NOTES TO FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING POLICIES
Accounting Principles
The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP).
Principles of Consolidation
The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments through which we are able to
exercise significant influence over but do not control the investee and are not the primary beneficiary of the investees activities are accounted for using the equity method. Investments through which we are not able to exercise significant
influence over the investee and which do not have readily determinable fair values are accounted for under the cost method.
Estimates and
Assumptions
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, and expenses. Examples of estimates include: loss contingencies; product warranties; the fair value of, and/or potential goodwill impairment for, our reporting units; product life cycles; useful lives of our tangible
and intangible assets; allowances for doubtful accounts; allowances for product returns; the market value of our inventory; and stock-based compensation forfeiture rates. Examples of assumptions include: the elements comprising a software
arrangement, including the distinction between upgrades or enhancements and new products; when technological feasibility is achieved for our products; the potential outcome of future tax consequences of events that have been recognized in our
consolidated financial statements or tax returns; and determining when investment impairments are other-than-temporary. Actual results and outcomes may differ from managements estimates and assumptions.
Recasting of Certain Prior Period Information
During the first quarter of fiscal year 2014, we changed our organizational structure as part of our transformation to a devices and services company. As a result, information that our chief operating decision
maker regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, beginning in fiscal year 2014, we reported our financial performance based on our new segments described in Note 21 Segment Information
and Geographic Data. We have recast certain prior period amounts to conform to the way we internally managed and monitored segment performance during fiscal year 2014. This change impacted Note 10 Goodwill, Note 14 Unearned Revenue,
and Note 21 Segment Information and Geographic Data, with no impact on our consolidated financial statements.
Foreign Currencies
Assets and liabilities recorded in foreign currencies are translated at the exchange rate on the balance sheet date. Revenue and
expenses are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded to other comprehensive income (OCI).
Revenue Recognition
Revenue is recognized
when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. Revenue generally is recognized net of allowances for returns and any taxes collected from customers and
subsequently remitted to governmental authorities.
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Revenue recognition for multiple-element arrangements requires judgment to determine if multiple
elements exist, whether elements can be accounted for as separate units of accounting, and if so, the fair value for each of the elements.
Microsoft enters into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue
is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. We use a hierarchy to determine the fair value to be used for allocating
revenue to elements: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence, and (iii) best estimate of selling price (ESP). For software elements, we follow the industry
specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not yet sold if it
is probable that the price will not change before introduction into the marketplace. ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. Our process for
determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
Revenue for retail packaged products, products licensed to original equipment manufacturers (OEMs), and perpetual licenses under certain volume licensing programs generally is recognized as products are
shipped or made available.
Technology guarantee programs are accounted for as multiple-element arrangements as customers receive free
or significantly discounted rights to use upcoming new versions of a software product if they license existing versions of the product during the eligibility period. Revenue is allocated between the existing product and the new product, and revenue
allocated to the new product is deferred until that version is delivered. The revenue allocation is based on the VSOE of fair value of the products. The VSOE of fair value for upcoming new products are based on the price determined by management
having the relevant authority when the element is not yet sold separately, but is expected to be sold in the near future at the price set by management.
Software updates that will be provided free of charge are evaluated on a case-by-case basis to determine whether they meet the definition of an upgrade and create a multiple-element arrangement, which may require
revenue to be deferred and recognized when the upgrade is delivered, or if it is determined that implied post-contract customer support (PCS) is being provided, the arrangement is accounted for as a multiple-element arrangement and all
revenue from the arrangement is deferred and recognized over the implied PCS term when the VSOE of fair value does not exist. If updates are determined to not meet the definition of an upgrade, revenue is generally recognized as products are shipped
or made available.
Certain volume licensing arrangements include a perpetual license for current products combined with rights to
receive unspecified future versions of software products (Software Assurance), which we have determined are additional software products and are therefore accounted for as subscriptions, with billings recorded as unearned revenue and
recognized as revenue ratably over the coverage period. Arrangements that include term-based licenses for current products with the right to use unspecified future versions of the software during the coverage period, are also accounted for as
subscriptions, with revenue recognized ratably over the coverage period.
Revenue from cloud-based services arrangements that allow for
the use of a hosted software product or service over a contractually determined period of time without taking possession of software are accounted for as subscriptions with billings recorded as unearned revenue and recognized as revenue ratably over
the coverage period beginning on the date the service is made available to customers. Revenue from cloud-based services arrangements that are provided on a consumption basis (for example, the amount of storage used in a particular period) is
recognized commensurate with the customer utilization of such resources.
Some volume licensing arrangements include time-based
subscriptions for cloud-based services and software offerings that are accounted for as subscriptions. These arrangements are considered multiple-element arrangements. However, because all elements are accounted for as subscriptions and have the
same coverage period and delivery pattern, they have the same revenue recognition timing.
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Revenue related to phones, Surface, Xbox consoles, games published by us, and other hardware
components is generally recognized when ownership is transferred to the resellers or to end customers when selling directly through Microsoft retail stores and online marketplaces. A portion of revenue may be deferred when these products are
combined with software elements, and/or services. Revenue related to licensing for games published by third parties for use on the Xbox consoles is recognized when games are manufactured by the game publishers.
Display advertising revenue is recognized as advertisements are displayed. Search advertising revenue is recognized when the ad appears in the
search results or when the action necessary to earn the revenue has been completed. Consulting services revenue is recognized as services are rendered, generally based on the negotiated hourly rate in the consulting arrangement and the number of
hours worked during the period. Consulting revenue for fixed-price services arrangements is recognized as services are provided. Revenue from prepaid points redeemable for the purchase of software or services is recognized upon redemption of the
points and delivery of the software or services.
Cost of Revenue
Cost of revenue includes: manufacturing and distribution costs for products sold and programs licensed; operating costs related to product support service centers and product distribution centers; costs incurred to
include software on PCs sold by OEMs, to drive traffic to our websites, and to acquire online advertising space (traffic acquisition costs); costs incurred to support and maintain Internet-based products and services, including
datacenter costs and royalties; warranty costs; inventory valuation adjustments; costs associated with the delivery of consulting services; and the amortization of capitalized research and development costs. Capitalized research and development
costs are amortized over the estimated lives of the products.
Product Warranty
We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is
recognized. For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and
conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years. For software warranties, we estimate the costs to
provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
Research and Development
Research and
development expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and
programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development
expense until the point that technological feasibility is reached, which for our software products, is generally shortly before the products are released to manufacturing. Once technological feasibility is reached, such costs are capitalized and
amortized to cost of revenue over the estimated lives of the products.
Sales and Marketing
Sales and marketing expenses include payroll, employee benefits, stock-based compensation expense, and other headcount-related expenses associated
with sales and marketing personnel, and the costs of advertising, promotions, trade shows, seminars, and other programs. Advertising costs are expensed as incurred. Advertising expense was $2.3 billion, $2.6 billion, and $1.6 billion in fiscal years
2014, 2013, and 2012, respectively.
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Stock-Based Compensation
We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the
stock award (generally four to five years) using the straight-line method.
Employee Stock Purchase Plan
Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value of the stock on the last day of
each three-month period. Compensation expense for the employee stock purchase plan is measured as the discount the employee is entitled to upon purchase and is recognized in the period of purchase.
Income Taxes
Income tax expense includes
U.S. and international income taxes, the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested, and interest and penalties on uncertain tax positions. Certain income and expenses are
not reported in tax returns and financial statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes. Deferred tax assets are reported net of a valuation allowance when it is more likely than not
that a tax benefit will not be realized. The deferred income taxes are classified as current or long-term based on the classification of the related asset or liability.
Fair Value Measurements
We account for certain assets and liabilities at fair value. The
hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest
level input that is significant to the fair value measurement in its entirety. These levels are:
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Level 1
inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. Our Level 1 non-derivative
investments primarily include U.S. government securities, domestic and international equities, and actively traded mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.
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Level 2
inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the
assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and
forward and spot prices for currencies and commodities. Our Level 2 non-derivative investments consist primarily of corporate notes and bonds, common and preferred stock, mortgage-backed securities, certificates of deposit, and foreign government
bonds. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.
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Level 3
inputs are generally unobservable and typically reflect managements estimates of assumptions that market participants would use in
pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 non-derivative assets primarily comprise investments in common and
preferred stock and goodwill when it is recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.
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We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be
other-than-temporarily impaired. The fair values of these investments are determined
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based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is
recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary.
Our other
current financial assets and our current financial liabilities have fair values that approximate their carrying values.
Financial Instruments
We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be
cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term
investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations. All cash
equivalents and short-term investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in market value, excluding other-than-temporary impairments, are reflected in
OCI.
Equity and other investments classified as long-term include both debt and equity instruments. With the exception of certain
corporate notes that are classified as held-to-maturity, debt and publicly-traded equity securities are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in the market value
of available-for-sale securities, excluding other-than-temporary impairments, are reflected in OCI. Held-to-maturity investments are recorded and held at amortized cost. Common and preferred stock and other investments that are restricted for more
than one year or are not publicly traded are recorded at cost or using the equity method.
We lend certain fixed-income and equity
securities to increase investment returns. The loaned securities continue to be carried as investments on our balance sheet. Cash and/or security interests are received as collateral for the loaned securities with the amount determined based upon
the underlying security lent and the creditworthiness of the borrower. Cash received is recorded as an asset with a corresponding liability.
Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by
management. We employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we
evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less than cost, and for equity securities, our intent and ability to hold, or plans to sell, the
investment. For fixed-income securities, we also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. We also consider specific adverse conditions related to
the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary,
an impairment charge is recorded to other income (expense) and a new cost basis in the investment is established.
Derivative
instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.
For derivative instruments designated as fair value hedges, the gains (losses) are recognized in earnings in the periods of change together with
the offsetting losses (gains) on the hedged items attributed to the risk being hedged. For options designated as fair value hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings.
For derivative instruments designated as cash-flow hedges, the effective portion of the gains (losses) on the derivatives is initially
reported as a component of OCI and is subsequently recognized in earnings when the hedged
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exposure is recognized in earnings. For options designated as cash-flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings.
Gains (losses) on derivatives representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in earnings.
For derivative instruments that are not designated as hedges, gains (losses) from changes in fair values are primarily recognized in other income (expense). Other than those derivatives entered into for investment
purposes, such as commodity contracts, the gains (losses) are generally economically offset by unrealized gains (losses) in the underlying available-for-sale securities, which are recorded as a component of OCI until the securities are sold or
other-than-temporarily impaired, at which time the amounts are reclassified from accumulated other comprehensive income (AOCI) into other income (expense).
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects our best
estimate of probable losses inherent in the accounts receivable balance. We determine the allowance based on known troubled accounts, historical experience, and other currently available evidence. Activity in the allowance for doubtful accounts was
as follows:
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|
|
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|
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(In millions)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
336
|
|
|
$
|
389
|
|
|
$
|
333
|
|
Charged to costs and other
|
|
|
16
|
|
|
|
4
|
|
|
|
115
|
|
Write-offs
|
|
|
(51
|
)
|
|
|
(57
|
)
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
301
|
|
|
$
|
336
|
|
|
$
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
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Inventories
Inventories are stated at average cost, subject to the lower of cost or market. Cost includes materials, labor, and manufacturing overhead related
to the purchase and production of inventories. We regularly review inventory quantities on hand, future purchase commitments with our suppliers, and the estimated utility of our inventory. If our review indicates a reduction in utility below
carrying value, we reduce our inventory to a new cost basis through a charge to cost of revenue. The determination of market value and the estimated volume of demand used in the lower of cost or market analysis require significant judgment.
Property and Equipment
Property and equipment is stated at cost and depreciated using the straight-line method over the shorter of the estimated useful life of the asset
or the lease term. The estimated useful lives of our property and equipment are generally as follows: computer software developed or acquired for internal use, three to seven years; computer equipment, two to three years; buildings and improvements,
five to 15 years; leasehold improvements, two to 20 years; and furniture and equipment, one to 10 years. Land is not depreciated.
Goodwill
Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an
annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
Intangible Assets
All of our intangible
assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 15 years. We evaluate the recoverability of intangible assets periodically by taking into account events
or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.
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Recent Accounting Guidance
Recently adopted accounting guidance
In December 2011, the Financial Accounting Standards
Board (FASB) issued guidance enhancing disclosure requirements about the nature of an entitys right to offset and related arrangements associated with its financial instruments. The new guidance requires the disclosure of the gross
amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed, and the related net exposure. In January 2013, the FASB clarified that the scope of this guidance applies to derivatives, repurchase
agreements, and securities lending arrangements that are either offset or subject to an enforceable master netting arrangement, or similar agreements. We adopted this new guidance beginning July 1, 2013. Adoption of this new guidance resulted
only in changes to the presentation of Note 5 Derivatives.
In February 2013, the FASB issued guidance on disclosure requirements
for items reclassified out of AOCI. This new guidance requires entities to present (either on the face of the income statement or in the notes to financial statements) the effects on the line items of the income statement for amounts reclassified
out of AOCI. We adopted this new guidance beginning July 1, 2013. Adoption of this new guidance resulted only in changes to the presentation of Note 19 Accumulated Other Comprehensive Income.
Recent accounting guidance not yet adopted
In March 2013, the FASB issued guidance on a parents accounting for the cumulative translation adjustment upon derecognition of a subsidiary
or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation
of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning July 1, 2014. We do not anticipate material impacts on our consolidated financial statements upon adoption.
In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards,
the FASB issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity
expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will be
effective for us beginning July 1, 2017 and early adoption is not permitted. We anticipate this standard will have a material impact, and we are currently evaluating the impact this standard will have on our consolidated financial statements.
NOTE 2 EARNINGS PER SHARE
Basic earnings per share (EPS) is computed based on the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive
potential common shares include outstanding stock options and stock awards.
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Item 8
The components of basic and diluted EPS are as follows:
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(In millions, except earnings per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Net income available for common shareholders (A)
|
|
$
|
22,074
|
|
|
$
|
21,863
|
|
|
$
|
16,978
|
|
|
|
|
|
Weighted average outstanding shares of common stock (B)
|
|
|
8,299
|
|
|
|
8,375
|
|
|
|
8,396
|
|
Dilutive effect of stock-based awards
|
|
|
100
|
|
|
|
95
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and common stock equivalents (C)
|
|
|
8,399
|
|
|
|
8,470
|
|
|
|
8,506
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Earnings Per Share
|
|
|
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|
|
|
|
|
|
|
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|
Basic (A/B)
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|
$
|
2.66
|
|
|
$
|
2.61
|
|
|
$
|
2.02
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|
Diluted (A/C)
|
|
$
|
2.63
|
|
|
$
|
2.58
|
|
|
$
|
2.00
|
|
|
|
Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods
presented.
NOTE 3 OTHER INCOME (EXPENSE)
The components of other income (expense) were as follows:
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|
|
|
|
|
|
|
|
|
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(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Dividends and interest income
|
|
$
|
883
|
|
|
$
|
677
|
|
|
$
|
800
|
|
Interest expense
|
|
|
(597
|
)
|
|
|
(429
|
)
|
|
|
(380
|
)
|
Net recognized gains on investments
|
|
|
437
|
|
|
|
116
|
|
|
|
564
|
|
Net losses on derivatives
|
|
|
(328
|
)
|
|
|
(196
|
)
|
|
|
(364
|
)
|
Net losses on foreign currency remeasurements
|
|
|
(165
|
)
|
|
|
(74
|
)
|
|
|
(117
|
)
|
Other
|
|
|
(169
|
)
|
|
|
194
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61
|
|
|
$
|
288
|
|
|
$
|
504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following are details of net recognized gains (losses) on investments during the periods reported:
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|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Other-than-temporary impairments of investments
|
|
$
|
(106
|
)
|
|
$
|
(208
|
)
|
|
$
|
(298
|
)
|
Realized gains from sales of available-for-sale securities
|
|
|
776
|
|
|
|
489
|
|
|
|
1,418
|
|
Realized losses from sales of available-for-sale securities
|
|
|
(233
|
)
|
|
|
(165
|
)
|
|
|
(556
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
437
|
|
|
$
|
116
|
|
|
$
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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NOTE 4 INVESTMENTS
Investment Components
The components of investments, including associated derivatives, but excluding held-to-maturity investments, were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Cost Basis
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Recorded
Basis
|
|
|
Cash
and Cash
Equivalents
|
|
|
Short-term
Investments
|
|
|
Equity
and Other
Investments
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,980
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,980
|
|
|
$
|
4,980
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Mutual funds
|
|
|
590
|
|
|
|
0
|
|
|
|
0
|
|
|
|
590
|
|
|
|
590
|
|
|
|
0
|
|
|
|
0
|
|
Commercial paper
|
|
|
189
|
|
|
|
0
|
|
|
|
0
|
|
|
|
189
|
|
|
|
89
|
|
|
|
100
|
|
|
|
0
|
|
Certificates of deposit
|
|
|
1,197
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,197
|
|
|
|
865
|
|
|
|
332
|
|
|
|
0
|
|
U.S. government and agency securities
|
|
|
66,952
|
|
|
|
103
|
|
|
|
(29
|
)
|
|
|
67,026
|
|
|
|
109
|
|
|
|
66,917
|
|
|
|
0
|
|
Foreign government bonds
|
|
|
3,328
|
|
|
|
17
|
|
|
|
(10
|
)
|
|
|
3,335
|
|
|
|
2,027
|
|
|
|
1,308
|
|
|
|
0
|
|
Mortgage-backed securities
|
|
|
991
|
|
|
|
30
|
|
|
|
(2
|
)
|
|
|
1,019
|
|
|
|
0
|
|
|
|
1,019
|
|
|
|
0
|
|
Corporate notes and bonds
|
|
|
6,845
|
|
|
|
191
|
|
|
|
(9
|
)
|
|
|
7,027
|
|
|
|
9
|
|
|
|
7,018
|
|
|
|
0
|
|
Municipal securities
|
|
|
287
|
|
|
|
45
|
|
|
|
0
|
|
|
|
332
|
|
|
|
0
|
|
|
|
332
|
|
|
|
0
|
|
Common and preferred stock
|
|
|
6,785
|
|
|
|
5,207
|
|
|
|
(81
|
)
|
|
|
11,911
|
|
|
|
0
|
|
|
|
0
|
|
|
|
11,911
|
|
Other investments
|
|
|
1,164
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,164
|
|
|
|
0
|
|
|
|
14
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
93,308
|
|
|
$
|
5,593
|
|
|
$
|
(131
|
)
|
|
$
|
98,770
|
|
|
$
|
8,669
|
|
|
$
|
77,040
|
|
|
$
|
13,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Cost Basis
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Recorded
Basis
|
|
|
Cash
and Cash
Equivalents
|
|
|
Short-term
Investments
|
|
|
Equity
and Other
Investments
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,967
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,967
|
|
|
$
|
1,967
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Mutual funds
|
|
|
868
|
|
|
|
0
|
|
|
|
0
|
|
|
|
868
|
|
|
|
868
|
|
|
|
0
|
|
|
|
0
|
|
Commercial paper
|
|
|
603
|
|
|
|
0
|
|
|
|
0
|
|
|
|
603
|
|
|
|
214
|
|
|
|
389
|
|
|
|
0
|
|
Certificates of deposit
|
|
|
994
|
|
|
|
0
|
|
|
|
0
|
|
|
|
994
|
|
|
|
609
|
|
|
|
385
|
|
|
|
0
|
|
U.S. government and agency securities
|
|
|
64,934
|
|
|
|
47
|
|
|
|
(84
|
)
|
|
|
64,897
|
|
|
|
146
|
|
|
|
64,751
|
|
|
|
0
|
|
Foreign government bonds
|
|
|
900
|
|
|
|
16
|
|
|
|
(41
|
)
|
|
|
875
|
|
|
|
0
|
|
|
|
875
|
|
|
|
0
|
|
Mortgage-backed securities
|
|
|
1,258
|
|
|
|
43
|
|
|
|
(13
|
)
|
|
|
1,288
|
|
|
|
0
|
|
|
|
1,288
|
|
|
|
0
|
|
Corporate notes and bonds
|
|
|
4,993
|
|
|
|
169
|
|
|
|
(40
|
)
|
|
|
5,122
|
|
|
|
0
|
|
|
|
5,122
|
|
|
|
0
|
|
Municipal securities
|
|
|
350
|
|
|
|
36
|
|
|
|
(1
|
)
|
|
|
385
|
|
|
|
0
|
|
|
|
385
|
|
|
|
0
|
|
Common and preferred stock
|
|
|
6,931
|
|
|
|
2,938
|
|
|
|
(281
|
)
|
|
|
9,588
|
|
|
|
0
|
|
|
|
0
|
|
|
|
9,588
|
|
Other investments
|
|
|
1,279
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,279
|
|
|
|
0
|
|
|
|
23
|
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,077
|
|
|
$
|
3,249
|
|
|
$
|
(460
|
)
|
|
$
|
87,866
|
|
|
$
|
3,804
|
|
|
$
|
73,218
|
|
|
$
|
10,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the investments in the table above, we also own corporate notes that were purchased in connection
with our agreement to lend $2.0 billion to the group that completed their acquisition of Dell on October 29, 2013. These corporate notes are classified as held-to-maturity investments and are included in equity and other investments on the
balance sheet. As of June 30, 2014, the amortized cost, recorded basis, and estimated fair value of these corporate notes was $1.5 billion, $1.5 billion, and $1.7 billion, respectively, while their associated gross unrecognized holding
gains were $164 million.
As of June 30, 2014 and 2013, the recorded bases of common and preferred stock that are restricted for
more than one year or are not publicly traded were $520 million and $395 million, respectively. These investments are carried at cost and are reviewed quarterly for indicators of other-than-temporary impairment. It is not practicable for us to
reliably estimate the fair value of these investments.
66
PART II
Item 8
Unrealized Losses on Investments
Investments, excluding those held-to-maturity, with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
|
|
|
Total
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Total
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
4,161
|
|
|
$
|
(29
|
)
|
|
$
|
850
|
|
|
$
|
0
|
|
|
$
|
5,011
|
|
|
$
|
(29
|
)
|
Foreign government bonds
|
|
|
566
|
|
|
|
(4
|
)
|
|
|
21
|
|
|
|
(6
|
)
|
|
|
587
|
|
|
|
(10
|
)
|
Mortgage-backed securities
|
|
|
120
|
|
|
|
0
|
|
|
|
61
|
|
|
|
(2
|
)
|
|
|
181
|
|
|
|
(2
|
)
|
Corporate notes and bonds
|
|
|
1,154
|
|
|
|
(8
|
)
|
|
|
34
|
|
|
|
(1
|
)
|
|
|
1,188
|
|
|
|
(9
|
)
|
Common and preferred stock
|
|
|
463
|
|
|
|
(48
|
)
|
|
|
257
|
|
|
|
(33
|
)
|
|
|
720
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,464
|
|
|
$
|
(89
|
)
|
|
$
|
1,223
|
|
|
$
|
(42
|
)
|
|
$
|
7,687
|
|
|
$
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
|
|
|
Total
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Fair Value
|
|
|
Unrealized
Losses
|
|
|
Total
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
2,208
|
|
|
$
|
(84
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,208
|
|
|
$
|
(84
|
)
|
Foreign government bonds
|
|
|
589
|
|
|
|
(18
|
)
|
|
|
69
|
|
|
|
(23
|
)
|
|
|
658
|
|
|
|
(41
|
)
|
Mortgage-backed securities
|
|
|
357
|
|
|
|
(12
|
)
|
|
|
39
|
|
|
|
(1
|
)
|
|
|
396
|
|
|
|
(13
|
)
|
Corporate notes and bonds
|
|
|
1,142
|
|
|
|
(38
|
)
|
|
|
27
|
|
|
|
(2
|
)
|
|
|
1,169
|
|
|
|
(40
|
)
|
Municipal securities
|
|
|
44
|
|
|
|
(1
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
44
|
|
|
|
(1
|
)
|
Common and preferred stock
|
|
|
1,166
|
|
|
|
(168
|
)
|
|
|
409
|
|
|
|
(113
|
)
|
|
|
1,575
|
|
|
|
(281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,506
|
|
|
$
|
(321
|
)
|
|
$
|
544
|
|
|
$
|
(139
|
)
|
|
$
|
6,050
|
|
|
$
|
(460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014, we did not hold any held-to-maturity investments that are in an unrealized loss position.
Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Unrealized losses from domestic
and international equities are due to market price movements. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of June 30, 2014.
Debt Investment Maturities
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Cost Basis
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
28,681
|
|
|
$
|
28,719
|
|
Due after one year through five years
|
|
|
46,734
|
|
|
|
46,881
|
|
Due after five years through 10 years
|
|
|
2,910
|
|
|
|
2,987
|
|
Due after 10 years
|
|
|
1,464
|
|
|
|
1,538
|
|
|
|
|
|
|
|
Total
(a)
|
|
$
|
79,789
|
|
|
$
|
80,125
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Excludes held-to-maturity investments due October 31, 2023 with a cost basis and estimated fair value at June 30, 2014 of $1.5 billion and $1.7
billion, respectively.
|
67
PART II
Item 8
NOTE 5 DERIVATIVES
We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; to
enhance investment returns; and to facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative
programs include strategies that both qualify and do not qualify for hedge accounting treatment. All notional amounts presented below are measured in U.S. dollar equivalents.
Foreign Currency
Certain forecasted transactions, assets, and liabilities are exposed to
foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. Option and forward contracts are used to hedge a portion of forecasted international revenue for
up to three years in the future and are designated as cash flow hedging instruments. Principal currencies hedged include the euro, Japanese yen, British pound, and Canadian dollar. As of June 30, 2014 and June 30, 2013, the total notional
amounts of these foreign exchange contracts sold were $4.9 billion and $5.1 billion, respectively.
Foreign currency risks related to
certain non-U.S. dollar denominated securities are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. As of June 30, 2014 and June 30, 2013, the total notional amounts of these foreign
exchange contracts sold were $3.1 billion and $407 million, respectively.
Certain options and forwards not designated as hedging
instruments are also used to manage the variability in exchange rates on accounts receivable, cash, and intercompany positions, and to manage other foreign currency exposures. As of June 30, 2014, the total notional amounts of these
foreign exchange contracts purchased and sold were $6.2 billion and $8.5 billion, respectively. As of June 30, 2013, the total notional amounts of these foreign exchange contracts purchased and sold were $5.0 billion and $7.9 billion,
respectively.
Equity
Securities held in our equity and other investments portfolio are subject to market price risk. Market price risk is managed relative to
broad-based global and domestic equity indices using certain convertible preferred investments, options, futures, and swap contracts not designated as hedging instruments. From time to time, to hedge our price risk, we may use and designate equity
derivatives as hedging instruments, including puts, calls, swaps, and forwards. As of June 30, 2014, the total notional amounts of equity contracts purchased and sold for managing market price risk were $3.1 billion and $2.1 billion,
respectively, of which $362 million and $420 million, respectively, were designated as hedging instruments. As of June 30, 2013, the total notional amounts of equity contracts purchased and sold for managing market price risk were $898 million
and $1.0 billion, respectively, none of which were designated as hedging instruments.
Interest Rate
Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average
maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option contracts, none of which are
designated as hedging instruments. As of June 30, 2014, the total notional amounts of fixed-interest rate contracts purchased and sold were $503 million and $741 million, respectively. As of June 30, 2013, the total notional amounts of
fixed-interest rate contracts purchased and sold were $1.1 billion and $809 million, respectively.
In addition, we use To Be
Announced forward purchase commitments of mortgage-backed assets to gain exposure to agency mortgage-backed securities. These meet the definition of a derivative instrument in cases where physical delivery of the assets is not taken at
the earliest available delivery date. As of June 30, 2014 and 2013, the total notional derivative amounts of mortgage contracts purchased were $1.1 billion and $1.2 billion, respectively.
68
PART II
Item 8
Credit
Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts, not designated as hedging instruments, to manage credit exposures relative to
broad-based indices and to facilitate portfolio diversification. We use credit default swaps as they are a low cost method of managing exposure to individual credit risks or groups of credit risks. As of June 30, 2014, the total notional
amounts of credit contracts purchased and sold were $412 million and $440 million, respectively. As of June 30, 2013, the total notional amounts of credit contracts purchased and sold were $377 million and $501 million, respectively.
Commodity
We use broad-based
commodity exposures to enhance portfolio returns and to facilitate portfolio diversification. We use swaps, futures, and option contracts, not designated as hedging instruments, to generate and manage exposures to broad-based commodity indices. We
use derivatives on commodities as they can be low-cost alternatives to the purchase and storage of a variety of commodities, including, but not limited to, precious metals, energy, and grain. As of June 30, 2014, the total notional amounts of
commodity contracts purchased and sold were $1.4 billion and $408 million, respectively. As of June 30, 2013, the total notional amounts of commodity contracts purchased and sold were $1.2 billion and $249 million, respectively.
Credit-Risk-Related Contingent Features
Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured
debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to
over-the-counter derivatives. As of June 30, 2014, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.
69
PART II
Item 8
Fair Values of Derivative Instruments
The following tables present the fair values of derivative instruments designated as hedging instruments (designated hedge derivatives)
and not designated as hedging instruments (non-designated hedge derivatives). The fair values exclude the impact of netting derivative assets and liabilities when a legally enforceable master netting agreement exists and fair value
adjustments related to our own credit risk and counterparty credit risk:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
(In millions)
|
|
Short-term
Investments
|
|
|
Other
Current
Assets
|
|
|
Equity and
Other
Investments
|
|
|
Other
Current
Liabilities
|
|
|
Short-term
Investments
|
|
|
Other
Current
Assets
|
|
|
Other
Current
Liabilities
|
|
|
|
|
|
|
|
Non-designated Hedge Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
10
|
|
|
$
|
39
|
|
|
$
|
0
|
|
|
$
|
(97
|
)
|
|
$
|
41
|
|
|
$
|
87
|
|
|
$
|
(63
|
)
|
Equity contracts
|
|
|
177
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(21
|
)
|
|
|
157
|
|
|
|
0
|
|
|
|
(9
|
)
|
Interest rate contracts
|
|
|
17
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(12
|
)
|
|
|
18
|
|
|
|
0
|
|
|
|
(45
|
)
|
Credit contracts
|
|
|
24
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(13
|
)
|
|
|
19
|
|
|
|
0
|
|
|
|
(17
|
)
|
Commodity contracts
|
|
|
15
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
0
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
243
|
|
|
$
|
39
|
|
|
$
|
0
|
|
|
$
|
(144
|
)
|
|
$
|
238
|
|
|
$
|
87
|
|
|
$
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated Hedge Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
1
|
|
|
$
|
70
|
|
|
$
|
0
|
|
|
$
|
(15
|
)
|
|
$
|
9
|
|
|
$
|
167
|
|
|
$
|
0
|
|
Equity contracts
|
|
|
0
|
|
|
|
0
|
|
|
|
7
|
|
|
|
(125
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1
|
|
|
$
|
70
|
|
|
$
|
7
|
|
|
$
|
(140
|
)
|
|
$
|
9
|
|
|
$
|
167
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross amounts of derivatives
|
|
$
|
244
|
|
|
$
|
109
|
|
|
$
|
7
|
|
|
$
|
(284
|
)
|
|
$
|
247
|
|
|
$
|
254
|
|
|
$
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross derivatives either offset or subject to an enforceable master netting agreement
|
|
$
|
99
|
|
|
$
|
109
|
|
|
$
|
7
|
|
|
$
|
(284
|
)
|
|
$
|
105
|
|
|
$
|
254
|
|
|
$
|
(97
|
)
|
Gross amounts offset in the balance sheet
|
|
|
(77
|
)
|
|
|
(71
|
)
|
|
|
(7
|
)
|
|
|
155
|
|
|
|
(72
|
)
|
|
|
(9
|
)
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts presented in the balance sheet
|
|
$
|
22
|
|
|
$
|
38
|
|
|
$
|
0
|
|
|
$
|
(129
|
)
|
|
$
|
33
|
|
|
$
|
245
|
|
|
$
|
(17
|
)
|
Gross amounts not offset in the balance sheet
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
22
|
|
|
$
|
38
|
|
|
$
|
0
|
|
|
$
|
(129
|
)
|
|
$
|
33
|
|
|
$
|
245
|
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See also Note 4 Investments and Note 6 Fair Value Measurements.
70
PART II
Item 8
Fair Value Hedge Gains (Losses)
We recognized in other income (expense) the following gains (losses) on contracts designated as fair value hedges and their related hedged items:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(14
|
)
|
|
$
|
70
|
|
|
$
|
52
|
|
Hedged items
|
|
|
6
|
|
|
|
(69
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
Total amount of ineffectiveness
|
|
$
|
(8
|
)
|
|
$
|
1
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(110
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
Hedged items
|
|
|
110
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Total amount of ineffectiveness
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of equity contracts excluded from effectiveness assessment
|
|
$
|
(9
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
Cash Flow Hedge Gains (Losses)
We recognized the following gains (losses) on foreign exchange contracts designated as cash flow hedges (our only cash flow hedges during the periods presented):
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Effective Portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains recognized in OCI, net of tax effects of
$2
, $54 and $127
|
|
$
|
63
|
|
|
$
|
101
|
|
|
$
|
236
|
|
Gains (losses) reclassified from AOCI into revenue
|
|
$
|
104
|
|
|
$
|
195
|
|
|
$
|
(27
|
)
|
|
|
|
|
Amount Excluded from Effectiveness Assessment and Ineffective Portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses recognized in other income (expense)
|
|
$
|
(239
|
)
|
|
$
|
(168
|
)
|
|
$
|
(231
|
)
|
|
|
We estimate that $32 million of net derivative gains included in AOCI at June 30, 2014 will be reclassified
into earnings within the following 12 months. No significant amounts of gains (losses) were reclassified from AOCI into earnings as a result of forecasted transactions that failed to occur during fiscal year 2014.
Non-Designated Derivative Gains (Losses)
Gains (losses) from changes in fair values of derivatives that are not designated as hedges are primarily recognized in other income (expense).
These amounts are shown in the table below, with the exception of gains (losses) on derivatives presented in income statement line items other than other income (expense), which were immaterial for the periods presented. Other than those derivatives
entered into for investment purposes, such as commodity contracts, the gains (losses) below are generally economically offset by unrealized gains (losses) in the underlying available-for-sale securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(78
|
)
|
|
$
|
18
|
|
|
$
|
(119
|
)
|
Equity contracts
|
|
|
(64
|
)
|
|
|
16
|
|
|
|
(85
|
)
|
Interest-rate contracts
|
|
|
24
|
|
|
|
(11
|
)
|
|
|
93
|
|
Credit contracts
|
|
|
13
|
|
|
|
(3
|
)
|
|
|
(7
|
)
|
Commodity contracts
|
|
|
71
|
|
|
|
(42
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(34
|
)
|
|
$
|
(22
|
)
|
|
$
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
PART II
Item 8
NOTE 6 FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Gross
Fair
Value
|
|
|
|
Netting
|
(a)
|
|
|
Net Fair
Value
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
590
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
590
|
|
|
$
|
0
|
|
|
$
|
590
|
|
Commercial paper
|
|
|
0
|
|
|
|
189
|
|
|
|
0
|
|
|
|
189
|
|
|
|
0
|
|
|
|
189
|
|
Certificates of deposit
|
|
|
0
|
|
|
|
1,197
|
|
|
|
0
|
|
|
|
1,197
|
|
|
|
0
|
|
|
|
1,197
|
|
U.S. government and agency securities
|
|
|
66,288
|
|
|
|
745
|
|
|
|
0
|
|
|
|
67,033
|
|
|
|
0
|
|
|
|
67,033
|
|
Foreign government bonds
|
|
|
139
|
|
|
|
3,210
|
|
|
|
0
|
|
|
|
3,349
|
|
|
|
0
|
|
|
|
3,349
|
|
Mortgage-backed securities
|
|
|
0
|
|
|
|
1,015
|
|
|
|
0
|
|
|
|
1,015
|
|
|
|
0
|
|
|
|
1,015
|
|
Corporate notes and bonds
|
|
|
0
|
|
|
|
6,863
|
|
|
|
0
|
|
|
|
6,863
|
|
|
|
0
|
|
|
|
6,863
|
|
Municipal securities
|
|
|
0
|
|
|
|
332
|
|
|
|
0
|
|
|
|
332
|
|
|
|
0
|
|
|
|
332
|
|
Common and preferred stock
|
|
|
9,552
|
|
|
|
1,825
|
|
|
|
14
|
|
|
|
11,391
|
|
|
|
0
|
|
|
|
11,391
|
|
Derivatives
|
|
|
5
|
|
|
|
348
|
|
|
|
7
|
|
|
|
360
|
|
|
|
(155
|
)
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
76,574
|
|
|
$
|
15,724
|
|
|
$
|
21
|
|
|
$
|
92,319
|
|
|
$
|
(155
|
)
|
|
$
|
92,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and other
|
|
$
|
5
|
|
|
$
|
153
|
|
|
$
|
126
|
|
|
$
|
284
|
|
|
$
|
(155
|
)
|
|
$
|
129
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Gross
Fair
Value
|
|
|
|
Netting
|
(a)
|
|
|
Net Fair
Value
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
868
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
868
|
|
|
$
|
0
|
|
|
$
|
868
|
|
Commercial paper
|
|
|
0
|
|
|
|
603
|
|
|
|
0
|
|
|
|
603
|
|
|
|
0
|
|
|
|
603
|
|
Certificates of deposit
|
|
|
0
|
|
|
|
994
|
|
|
|
0
|
|
|
|
994
|
|
|
|
0
|
|
|
|
994
|
|
U.S. government and agency securities
|
|
|
62,237
|
|
|
|
2,664
|
|
|
|
0
|
|
|
|
64,901
|
|
|
|
0
|
|
|
|
64,901
|
|
Foreign government bonds
|
|
|
9
|
|
|
|
851
|
|
|
|
0
|
|
|
|
860
|
|
|
|
0
|
|
|
|
860
|
|
Mortgage-backed securities
|
|
|
0
|
|
|
|
1,311
|
|
|
|
0
|
|
|
|
1,311
|
|
|
|
0
|
|
|
|
1,311
|
|
Corporate notes and bonds
|
|
|
0
|
|
|
|
4,915
|
|
|
|
19
|
|
|
|
4,934
|
|
|
|
0
|
|
|
|
4,934
|
|
Municipal securities
|
|
|
0
|
|
|
|
385
|
|
|
|
0
|
|
|
|
385
|
|
|
|
0
|
|
|
|
385
|
|
Common and preferred stock
|
|
|
8,470
|
|
|
|
717
|
|
|
|
5
|
|
|
|
9,192
|
|
|
|
0
|
|
|
|
9,192
|
|
Derivatives
|
|
|
12
|
|
|
|
489
|
|
|
|
0
|
|
|
|
501
|
|
|
|
(81
|
)
|
|
|
420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
71,596
|
|
|
$
|
12,929
|
|
|
$
|
24
|
|
|
$
|
84,549
|
|
|
$
|
(81
|
)
|
|
$
|
84,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and other
|
|
$
|
14
|
|
|
$
|
121
|
|
|
$
|
0
|
|
|
$
|
135
|
|
|
$
|
(80
|
)
|
|
$
|
55
|
|
|
|
(a)
|
These amounts represent the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement exists and
fair value adjustments related to our own credit risk and counterparty credit risk.
|
In connection with the
transaction to acquire substantially all of Nokia Corporations (Nokia) Devices and Services Business (NDS), on September 23, 2013 we provided Nokia
1.5 billion ($2.1 billion) principal of convertible notes classified as Level 3 financial instruments. Upon closing of the acquisition, Nokia repurchased these notes at their principal amount plus accrued
interest. All other changes in our Level 3 financial instruments that are measured at fair value on a recurring basis were immaterial during the periods presented.
72
PART II
Item 8
The following table reconciles the total Net Fair Value of assets above to the balance sheet
presentation of these same assets in Note 4 Investments.
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
June 30,
|
|
2014
|
|
|
2013
|
|
|
|
|
Net fair value of assets measured at fair value on a recurring basis
|
|
$
|
92,164
|
|
|
$
|
84,468
|
|
Cash
|
|
|
4,980
|
|
|
|
1,967
|
|
Common and preferred stock measured at fair value on a nonrecurring basis
|
|
|
520
|
|
|
|
395
|
|
Other investments measured at fair value on a nonrecurring basis
|
|
|
1,150
|
|
|
|
1,256
|
|
Less derivative net assets classified as other current assets
|
|
|
(38
|
)
|
|
|
(213
|
)
|
Other
|
|
|
(6
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
Recorded basis of investment components
(a)
|
|
$
|
98,770
|
|
|
$
|
87,866
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Excludes held-to-maturity investments recorded at amortized cost and measured at fair value on a nonrecurring basis.
|
Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During fiscal year 2014 and 2013, we did not record any material other-than-temporary impairments on financial assets required to be measured at fair value on a nonrecurring basis.
NOTE 7 INVENTORIES
The components of inventories were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
June 30,
|
|
2014
|
|
|
2013
|
|
|
|
|
Raw materials
|
|
$
|
944
|
|
|
$
|
328
|
|
Work in process
|
|
|
266
|
|
|
|
201
|
|
Finished goods
|
|
|
1,450
|
|
|
|
1,409
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,660
|
|
|
$
|
1,938
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
June 30,
|
|
2014
|
|
|
2013
|
|
|
|
|
Land
|
|
$
|
541
|
|
|
$
|
525
|
|
Buildings and improvements
|
|
|
8,867
|
|
|
|
7,326
|
|
Leasehold improvements
|
|
|
3,560
|
|
|
|
2,946
|
|
Computer equipment and software
|
|
|
11,430
|
|
|
|
9,242
|
|
Furniture and equipment
|
|
|
3,406
|
|
|
|
2,465
|
|
|
|
|
|
|
|
Total, at cost
|
|
|
27,804
|
|
|
|
22,504
|
|
Accumulated depreciation
|
|
|
(14,793
|
)
|
|
|
(12,513
|
)
|
|
|
|
|
|
|
Total, net
|
|
$
|
13,011
|
|
|
$
|
9,991
|
|
|
|
|
|
|
|
|
|
|
During fiscal years 2014, 2013, and 2012, depreciation expense was $3.4 billion, $2.6 billion, and $2.2 billion,
respectively.
73
PART II
Item 8
NOTE 9 BUSINESS COMBINATIONS
Nokias Devices and Services Business
On April 25, 2014, we completed the transaction to acquire substantially all of NDS for a total purchase price of $9.5 billion, including cash acquired of $1.5 billion (the Acquisition). The
purchase price consisted primarily of cash of $7.1 billion and Nokias repurchase of convertible notes of $2.1 billion which was a non-cash transaction. The Acquisition is expected to accelerate the growth of our Devices and Consumer
(D&C) business through faster innovation, synergies, and unified branding and marketing.
The purchase price allocation
as of the date of the Acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed become available.
The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Cash
|
|
$
|
1,503
|
|
Accounts
receivable
(a)
|
|
|
754
|
|
Inventories
|
|
|
544
|
|
Other current assets
|
|
|
960
|
|
Property and equipment
|
|
|
981
|
|
Intangible assets
|
|
|
4,509
|
|
Goodwill
(b)
|
|
|
5,458
|
|
Other
|
|
|
249
|
|
Current liabilities
|
|
|
(4,576
|
)
|
Long-term liabilities
|
|
|
(917
|
)
|
|
|
Total purchase price
|
|
$
|
9,465
|
|
|
|
|
|
|
(a)
|
Gross accounts receivable is $901 million, of which $147 million is expected to be uncollectible.
|
(b)
|
Goodwill was assigned to our new Phone Hardware segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from
the integration of NDS. Goodwill of $4.5 billion is expected to be deductible in Finland for tax purposes.
|
Following
are the details of the purchase price allocated to the intangible assets acquired:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Amount
|
|
|
Weighted
Average Life
|
|
|
|
|
|
|
Technology-based
|
|
$
|
2,493
|
|
|
|
9 years
|
|
Contract-based
|
|
|
1,500
|
|
|
|
9 years
|
|
Customer-related
|
|
|
359
|
|
|
|
3 years
|
|
Marketing-related (trade names)
|
|
|
157
|
|
|
|
2 years
|
|
|
|
|
|
|
|
Fair value of intangible assets acquired
|
|
$
|
4,509
|
|
|
|
8 years
|
|
|
|
|
|
|
|
|
|
|
Our consolidated income statement for fiscal year 2014 includes revenue and operating loss of $2.0 billion and $692
million, respectively, attributable to NDS since the Acquisition.
74
PART II
Item 8
Following are the supplemental consolidated results of Microsoft Corporation on an unaudited pro
forma basis, as if the Acquisition had been consummated on July 1, 2012:
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
|
|
Revenue
|
|
$
|
96,248
|
|
|
$
|
93,243
|
|
Net income
|
|
$
|
20,234
|
|
|
$
|
20,153
|
|
Diluted earnings per share
|
|
$
|
2.41
|
|
|
$
|
2.38
|
|
|
|
These pro forma results were based on estimates and assumptions, which we believe are reasonable. They are not the
results that would have been realized had we been a combined company during the periods presented and are not necessarily indicative of our consolidated results of operations in future periods. The pro forma results include adjustments primarily
related to purchase accounting adjustments and the elimination of related party transactions between Microsoft and NDS. Acquisition costs and other non-recurring charges incurred are included in the earliest period presented.
During the fourth quarter of fiscal year 2014, we incurred $21 million of acquisition costs associated with the purchase of NDS. Acquisition costs
are primarily comprised of transaction fees and direct acquisition costs, including legal, finance, consulting, and other professional fees. These costs are included in Integration and restructuring costs on our consolidated income statement for
fiscal year 2014.
Certain concurrent transactions were recognized separately from the Acquisition. Prior to the Acquisition, we had
joint strategic initiatives with Nokia; this contractual relationship was terminated in conjunction with the Acquisition. No gain or loss was recorded upon termination of this agreement, as it was determined to be at market value. In addition, we
agreed to license Nokias mapping services and will pay Nokia separately for the services provided under a four-year license as they are rendered.
Yammer
On July 18, 2012, we acquired
Yammer, Inc. (Yammer), a leading provider of enterprise social networks, for $1.1 billion in cash. Yammer will continue to develop its standalone service and will add an enterprise social networking service to Microsofts portfolio
of complementary cloud-based services. The major classes of assets to which we allocated the purchase price were goodwill of $937 million and identifiable intangible assets of $178 million. We assigned the goodwill to Commercial Other under our
current segment structure. Yammer was consolidated into our results of operations starting on the acquisition date.
Skype
On October 13, 2011, we acquired Skype Global S.á r.l. (Skype), a leading global provider of software applications and
related Internet communications products based in Luxembourg, for $8.6 billion, primarily in cash. The major classes of assets and liabilities to which we allocated the purchase price were goodwill of $7.1 billion, identifiable intangible assets of
$1.6 billion, and unearned revenue of $222 million. The goodwill recognized in connection with the acquisition is primarily attributable to our expectation of extending Skypes brand and the reach of its networked platform, while enhancing
Microsofts existing portfolio of real-time communications products and services. We assigned the goodwill to the following segments under our current segment structure: $5.6 billion to Commercial Licensing, $1.4 billion to Computing and Gaming
Hardware, and $54 million to D&C Other. Skype was consolidated into our results of operations starting on the acquisition date.
75
PART II
Item 8
Following are the details of the purchase price allocated to the intangible assets acquired:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Weighted
Average Life
|
|
|
|
|
|
|
Marketing-related (trade names)
|
|
$
|
1,249
|
|
|
|
15 years
|
|
Technology-based
|
|
|
275
|
|
|
|
5 years
|
|
Customer-related
|
|
|
114
|
|
|
|
5 years
|
|
Contract-based
|
|
|
10
|
|
|
|
4 years
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,648
|
|
|
|
13 years
|
|
|
|
|
|
|
|
|
|
|
Other
During fiscal year 2014, we completed five additional acquisitions for total consideration of $140 million, all of which was paid in cash. These
entities have been included in our consolidated results of operations since their respective acquisition dates.
With the exception of
NDS, pro forma results of operations have not been presented because the effects of the business combinations described in this note, individually and in aggregate, were not material to our consolidated results of operations.
NOTE 10 GOODWILL
Changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
June 30,
2012
|
|
|
Acquisitions
|
|
|
Other
|
|
|
June 30,
2013
|
|
|
Acquisitions
|
|
|
Other
|
|
|
June 30,
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Devices and Consumer
|
|
Licensing
|
|
$
|
866
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
866
|
|
|
$
|
0
|
|
|
$
|
2
|
|
|
$
|
868
|
|
|
|
Hardware:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Gaming Hardware
|
|
|
1,641
|
|
|
|
75
|
|
|
|
(27
|
)
|
|
|
1,689
|
|
|
|
0
|
|
|
|
9
|
|
|
|
1,698
|
|
|
|
Phone Hardware
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5,458
|
(a)
|
|
|
(104
|
)
|
|
|
5,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total D&C Hardware
|
|
|
1,641
|
|
|
|
75
|
|
|
|
(27
|
)
|
|
|
1,689
|
|
|
|
5,458
|
|
|
|
(95
|
)
|
|
|
7,052
|
|
|
|
Other
|
|
|
742
|
|
|
|
0
|
|
|
|
(4
|
)
|
|
|
738
|
|
|
|
0
|
|
|
|
0
|
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Devices and Consumer
|
|
|
3,249
|
|
|
|
75
|
|
|
|
(31
|
)
|
|
|
3,293
|
|
|
|
5,458
|
|
|
|
(93
|
)
|
|
|
8,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Licensing
|
|
|
10,054
|
|
|
|
4
|
|
|
|
(7
|
)
|
|
|
10,051
|
|
|
|
2
|
|
|
|
5
|
|
|
|
10,058
|
|
|
|
Other
|
|
|
149
|
|
|
|
1,164
|
|
|
|
(2
|
)
|
|
|
1,311
|
|
|
|
105
|
|
|
|
(5
|
)
|
|
|
1,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial
|
|
|
10,203
|
|
|
|
1,168
|
|
|
|
(9
|
)
|
|
|
11,362
|
|
|
|
107
|
|
|
|
0
|
|
|
|
11,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill
|
|
$
|
13,452
|
|
|
$
|
1,243
|
|
|
$
|
(40
|
)
|
|
$
|
14,655
|
|
|
$
|
5,565
|
|
|
$
|
(93
|
)
|
|
$
|
20,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Goodwill acquired during fiscal year 2014 related to the acquisition of NDS. See Note 9 Business Combinations for additional details.
|
The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on
the facts and circumstances that existed as of the acquisition dates becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a recasting of the amounts allocated to goodwill retroactive to the periods in
which the acquisitions occurred.
76
PART II
Item 8
Any change in the goodwill amounts resulting from foreign currency translations are presented as
Other in the above table. Also included in Other are business dispositions and transfers between business segments due to reorganizations, as applicable.
As discussed in Note 21 Segment Information and Geographic Data, during the first quarter of fiscal year 2014, we changed our organizational
structure as part of our transformation to a devices and services company. This resulted in a change in our operating segments and reporting units. We allocated goodwill to our new reporting units using a relative fair value approach. In addition,
we completed an assessment of any potential goodwill impairment for all reporting units immediately prior to the reallocation and determined that no impairment existed.
Goodwill Impairment
We test goodwill for impairment annually on May 1 at the reporting
unit level using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.
No impairment of goodwill was identified as of May 1, 2014 or May 1, 2013. Upon completion of the fiscal year 2012 test, the goodwill of
our OSD unit (in Devices and Consumer Other under our current segment structure) was determined to be impaired. The impairment was the result of the OSD unit experiencing slower than projected growth in search queries and search advertising revenue
per query, slower growth in display revenue, and changes in the timing and implementation of certain initiatives designed to drive search and display revenue growth in the future. This goodwill impairment charge of $6.2 billion also represented our
accumulated goodwill impairment as of June 30, 2014 and 2013.
NOTE 11 INTANGIBLE ASSETS
The components of intangible assets, all of which are finite-lived, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
Technology-based
(a)
|
|
$
|
6,440
|
|
|
$
|
(2,615
|
)
|
|
$
|
3,825
|
|
|
$
|
3,760
|
|
|
$
|
(2,110
|
)
|
|
$
|
1,650
|
|
Marketing-related
|
|
|
1,518
|
|
|
|
(324
|
)
|
|
|
1,194
|
|
|
|
1,348
|
|
|
|
(211
|
)
|
|
|
1,137
|
|
Contract-based
|
|
|
2,266
|
|
|
|
(716
|
)
|
|
|
1,550
|
|
|
|
823
|
|
|
|
(688
|
)
|
|
|
135
|
|
Customer-related
|
|
|
732
|
|
|
|
(320
|
)
|
|
|
412
|
|
|
|
380
|
|
|
|
(219
|
)
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,956
|
|
|
$
|
(3,975
|
)
|
|
$
|
6,981
|
|
|
$
|
6,311
|
|
|
$
|
(3,228
|
)
|
|
$
|
3,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Technology-based intangible assets included $98 million and $218 million as of June 30, 2014 and 2013, respectively, of net carrying amount of
software to be sold, leased, or otherwise marketed.
|
We estimate that we have no significant residual value
related to our intangible assets. No material impairments of intangible assets were identified during any of the periods presented.
The
components of intangible assets acquired during the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Amount
|
|
|
Weighted
Average Life
|
|
|
Amount
|
|
|
Weighted
Average Life
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
Technology-based
|
|
$
|
2,841
|
|
|
|
9 years
|
|
|
$
|
539
|
|
|
|
4 years
|
|
Marketing-related
|
|
|
174
|
|
|
|
2 years
|
|
|
|
39
|
|
|
|
7 years
|
|
Contract-based
|
|
|
1,500
|
|
|
|
9 years
|
|
|
|
0
|
|
|
|
*
|
|
Customer-related
|
|
|
363
|
|
|
|
3 years
|
|
|
|
89
|
|
|
|
6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,878
|
|
|
|
8 years
|
|
|
$
|
667
|
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
PART II
Item 8
The table above includes $4.5 billion related to the acquisition of NDS during fiscal year 2014.
See Note 9 Business Combination for additional details.
Intangible assets amortization expense was $845 million, $739 million,
and $558 million for fiscal years 2014, 2013, and 2012, respectively. Amortization of capitalized software was $200 million, $210 million, and $117 million for fiscal years 2014, 2013, and 2012, respectively.
The following table outlines the estimated future amortization expense related to intangible assets held at June 30, 2014:
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Year Ending June 30,
|
|
|
|
|
|
|
2015
|
|
$
|
1,237
|
|
2016
|
|
|
1,075
|
|
2017
|
|
|
804
|
|
2018
|
|
|
661
|
|
2019
|
|
|
637
|
|
Thereafter
|
|
|
2,567
|
|
|
|
Total
|
|
$
|
6,981
|
|
|
|
|
|
|
NOTE 12 DEBT
As of June 30, 2014, we had $22.6 billion of issued and outstanding debt, comprising $2.0 billion of short-term debt and
$20.6 billion of long-term debt. As of June 30, 2013, we had $15.6 billion of issued and outstanding long-term debt.
Short-term Debt
As of June 30, 2014, we had $2.0 billion of commercial paper issued and outstanding, with a weighted-average interest rate of 0.12% and
maturities ranging from 86 days to 91 days. The estimated fair value of this commercial paper approximates its carrying value.
We have
a $5.0 billion credit facility that expires on November 14, 2018, which serves as a back-up for our commercial paper program. As of June 30, 2014, we were in compliance with the only financial covenant in the credit agreement, which
requires us to maintain a coverage ratio of at least three times earnings before interest, taxes, depreciation, and amortization to interest expense, as defined in the credit agreement. No amounts were drawn against the credit facility during any of
the periods presented.
Long-term Debt
As of June 30, 2014, the total carrying value and estimated fair value of our long-term debt were $20.6 billion and $21.5 billion, respectively. This is compared to a carrying value and estimated fair value of
our long-term debt, including the current portion, of $15.6 billion and $15.8 billion, respectively, as of June 30, 2013. These estimated fair values are based on Level 2 inputs.
78
PART II
Item 8
The components of our long-term debt and the associated interest rates were as follows as of
June 30, 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Date
|
|
Face Value
June 30,
2014
|
|
|
Face Value
June 30,
2013
|
|
|
Stated
Interest
Rate
|
|
|
Effective
Interest
Rate
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2013
|
|
$
|
*
|
|
|
$
|
1,000
|
|
|
|
0.875%
|
|
|
|
1.000%
|
|
June 1, 2014
|
|
|
*
|
|
|
|
2,000
|
|
|
|
2.950%
|
|
|
|
3.049%
|
|
September 25, 2015
|
|
|
1,750
|
|
|
|
1,750
|
|
|
|
1.625%
|
|
|
|
1.795%
|
|
February 8, 2016
|
|
|
750
|
|
|
|
750
|
|
|
|
2.500%
|
|
|
|
2.642%
|
|
November 15, 2017
|
|
|
600
|
|
|
|
600
|
|
|
|
0.875%
|
|
|
|
1.084%
|
|
May 1, 2018
|
|
|
450
|
|
|
|
450
|
|
|
|
1.000%
|
|
|
|
1.106%
|
|
December 6, 2018
(a)
|
|
|
1,250
|
|
|
|
*
|
|
|
|
1.625%
|
|
|
|
1.824%
|
|
June 1, 2019
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
4.200%
|
|
|
|
4.379%
|
|
October 1, 2020
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
3.000%
|
|
|
|
3.137%
|
|
February 8, 2021
|
|
|
500
|
|
|
|
500
|
|
|
|
4.000%
|
|
|
|
4.082%
|
|
December 6, 2021
(b)
|
|
|
2,396
|
|
|
|
*
|
|
|
|
2.125%
|
|
|
|
2.233%
|
|
November 15, 2022
|
|
|
750
|
|
|
|
750
|
|
|
|
2.125%
|
|
|
|
2.239%
|
|
May 1, 2023
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
2.375%
|
|
|
|
2.465%
|
|
December 15, 2023
(a)
|
|
|
1,500
|
|
|
|
*
|
|
|
|
3.625%
|
|
|
|
3.726%
|
|
December 6, 2028
(b)
|
|
|
2,396
|
|
|
|
*
|
|
|
|
3.125%
|
|
|
|
3.218%
|
|
May 2,
2033
(c)
|
|
|
753
|
|
|
|
715
|
|
|
|
2.625%
|
|
|
|
2.690%
|
|
June 1, 2039
|
|
|
750
|
|
|
|
750
|
|
|
|
5.200%
|
|
|
|
5.240%
|
|
October 1, 2040
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
4.500%
|
|
|
|
4.567%
|
|
February 8, 2041
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
5.300%
|
|
|
|
5.361%
|
|
November 15, 2042
|
|
|
900
|
|
|
|
900
|
|
|
|
3.500%
|
|
|
|
3.571%
|
|
May 1, 2043
|
|
|
500
|
|
|
|
500
|
|
|
|
3.750%
|
|
|
|
3.829%
|
|
December 15, 2043
(a)
|
|
|
500
|
|
|
|
*
|
|
|
|
4.875%
|
|
|
|
4.918%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,745
|
|
|
$
|
15,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
In December 2013, we issued $3.3 billion of debt securities.
|
(b)
|
In December 2013, we issued 3.5 billion of debt securities.
|
(c)
|
In April 2013, we issued 550 million of debt securities.
|
The
notes in this table are senior unsecured obligations and rank equally with our other senior unsecured debt outstanding. Interest on these notes is paid semi-annually, except for the euro-denominated debt securities on which interest is paid
annually. Cash paid for interest on our debt for fiscal years 2014, 2013, and 2012 was $509 million, $371 million, and $344 million, respectively. As of June 30, 2014 and 2013, the aggregate unamortized discount for our long-term debt,
including the current portion, was $100 million and $65 million, respectively.
79
PART II
Item 8
Debt Service
Maturities of our long-term debt for each of the next five years and thereafter are as follows:
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Year Ending June 30,
|
|
|
|
|
|
|
2015
|
|
$
|
0
|
|
2016
|
|
|
2,500
|
|
2017
|
|
|
0
|
|
2018
|
|
|
1,050
|
|
2019
|
|
|
2,250
|
|
Thereafter
|
|
|
14,945
|
|
|
|
Total
|
|
$
|
20,745
|
|
|
|
|
|
|
NOTE 13 INCOME TAXES
The components of the provision for income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Current Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
3,738
|
|
|
$
|
3,131
|
|
|
$
|
2,235
|
|
U.S. state and local
|
|
|
266
|
|
|
|
332
|
|
|
|
153
|
|
Foreign
|
|
|
2,073
|
|
|
|
1,745
|
|
|
|
1,947
|
|
|
|
|
|
|
|
|
|
|
|
Current taxes
|
|
|
6,077
|
|
|
|
5,208
|
|
|
|
4,335
|
|
|
|
|
|
Deferred Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes
|
|
|
(331
|
)
|
|
|
(19
|
)
|
|
|
954
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
5,746
|
|
|
$
|
5,189
|
|
|
$
|
5,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and foreign components of income before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
U.S.
|
|
$
|
7,127
|
|
|
$
|
6,674
|
|
|
$
|
1,600
|
|
Foreign
|
|
|
20,693
|
|
|
|
20,378
|
|
|
|
20,667
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
27,820
|
|
|
$
|
27,052
|
|
|
$
|
22,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our
effective rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Federal statutory rate
|
|
|
35.0%
|
|
|
|
35.0%
|
|
|
|
35.0%
|
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign earnings taxed at lower rates
|
|
|
(17.1)%
|
|
|
|
(17.5)%
|
|
|
|
(21.1)%
|
|
Goodwill impairment
|
|
|
0%
|
|
|
|
0%
|
|
|
|
9.7%
|
|
Other reconciling items, net
|
|
|
2.8%
|
|
|
|
1.7%
|
|
|
|
0.2%
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
20.7%
|
|
|
|
19.2%
|
|
|
|
23.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reduction from the federal statutory rate from foreign earnings taxed at lower rates results from producing and
distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and
80
PART II
Item 8
Puerto Rico. Our foreign earnings, which are taxed at rates lower than the U.S. rate and are generated from our regional operating centers, were 81%, 79%, and 79% of our foreign income before tax
in fiscal years 2014, 2013, and 2012, respectively. In general, other reconciling items consist of interest, adjustments for intercompany transfer pricing, U.S. state income taxes, domestic production deductions, and credits. In fiscal years 2014,
2013, and 2012, there were no individually significant other reconciling items.
The components of the deferred income tax assets and
liabilities were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2014
|
|
|
2013
|
|
|
|
|
Deferred Income Tax Assets
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
903
|
|
|
$
|
888
|
|
Other expense items
|
|
|
1,112
|
|
|
|
917
|
|
Unearned revenue
|
|
|
520
|
|
|
|
445
|
|
Impaired investments
|
|
|
209
|
|
|
|
246
|
|
Loss carryforwards
|
|
|
922
|
|
|
|
715
|
|
Other revenue items
|
|
|
64
|
|
|
|
55
|
|
|
|
|
|
|
|
Deferred income tax assets
|
|
$
|
3,730
|
|
|
$
|
3,266
|
|
Less valuation allowance
|
|
|
(903
|
)
|
|
|
(579
|
)
|
|
|
|
|
|
|
Deferred income tax assets, net of valuation allowance
|
|
$
|
2,827
|
|
|
$
|
2,687
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Tax Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Foreign earnings
|
|
$
|
(1,140
|
)
|
|
$
|
(1,146
|
)
|
Unrealized gain on investments
|
|
|
(1,911
|
)
|
|
|
(1,012
|
)
|
Depreciation and amortization
|
|
|
(470
|
)
|
|
|
(604
|
)
|
Other
|
|
|
(87
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
Deferred income tax liabilities
|
|
$
|
(3,608
|
)
|
|
$
|
(2,764
|
)
|
|
|
|
|
|
|
Net deferred income tax assets (liabilities)
|
|
$
|
(781
|
)
|
|
$
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported As
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred income tax assets
|
|
$
|
1,941
|
|
|
$
|
1,632
|
|
Other current liabilities
|
|
|
(125
|
)
|
|
|
0
|
|
Other long-term assets
|
|
|
131
|
|
|
|
0
|
|
Long-term deferred income tax liabilities
|
|
|
(2,728
|
)
|
|
|
(1,709
|
)
|
|
|
|
|
|
|
Net deferred income tax assets (liabilities)
|
|
$
|
(781
|
)
|
|
$
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
As of June 30, 2014, we had net operating loss carryforwards of $3.6 billion, including $2.2 billion of
foreign net operating loss carryforwards acquired through our acquisition of Skype, and $545 million through our acquisition of NDS. The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards and
other net deferred tax assets that may not be realized.
Deferred income tax balances reflect the effects of temporary differences
between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are actually paid or recovered.
As of June 30, 2014, we have not provided deferred U.S. income taxes or foreign withholding taxes on temporary differences of approximately
$92.9 billion resulting from earnings for certain non-U.S. subsidiaries which are permanently reinvested outside the U.S. The unrecognized deferred tax liability associated with these temporary differences was approximately $29.6 billion at
June 30, 2014.
Income taxes paid were $5.5 billion, $3.9 billion, and $3.5 billion in fiscal years 2014, 2013, and 2012,
respectively.
81
PART II
Item 8
Uncertain Tax Positions
Unrecognized tax benefits as of June 30, 2014, 2013, and 2012, were $8.7 billion, $8.6 billion, and $7.2 billion, respectively. If recognized, these tax benefits would affect our effective tax rates for fiscal
years 2014, 2013, and 2012, by $7.0 billion, $6.5 billion, and $6.2 billion, respectively.
As of June 30, 2014, 2013, and 2012, we
had accrued interest expense related to uncertain tax positions of $1.5 billion, $1.3 billion, and $939 million, respectively, net of federal income tax benefits. Interest expense on unrecognized tax benefits was $235 million, $400 million, and $154
million in fiscal years 2014, 2013, and 2012, respectively.
The aggregate changes in the balance of unrecognized tax benefits were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
8,648
|
|
|
$
|
7,202
|
|
|
$
|
6,935
|
|
Decreases related to settlements
|
|
|
(583
|
)
|
|
|
(30
|
)
|
|
|
(16
|
)
|
Increases for tax positions related to the current year
|
|
|
566
|
|
|
|
612
|
|
|
|
481
|
|
Increases for tax positions related to prior years
|
|
|
217
|
|
|
|
931
|
|
|
|
118
|
|
Decreases for tax positions related to prior years
|
|
|
(95
|
)
|
|
|
(65
|
)
|
|
|
(292
|
)
|
Decreases due to lapsed statutes of limitations
|
|
|
(39
|
)
|
|
|
(2
|
)
|
|
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
8,714
|
|
|
$
|
8,648
|
|
|
$
|
7,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of fiscal year 2011, we reached a settlement of a portion of an I.R.S. audit of tax years
2004 to 2006, which reduced our income tax expense by $461 million. While we settled a portion of the I.R.S. audit, we remain under audit for these years. In February 2012, the I.R.S. withdrew its 2011 Revenue Agents Report and reopened the audit
phase of the examination. As of June 30, 2014, the primary unresolved issue relates to transfer pricing, which could have a significant impact on our consolidated financial statements if not resolved favorably. We believe our allowances for
income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not
anticipate a significant increase or decrease to our tax contingencies for these issues within the next 12 months. We also continue to be subject to examination by the I.R.S. for tax years 2007 to 2013.
We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax
years 1996 to 2013, some of which are currently under audit by local tax authorities. The resolutions of these audits are not expected to be material to our consolidated financial statements.
NOTE 14 UNEARNED REVENUE
Unearned revenue by segment was as follows, with segments with significant balances shown separately:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2014
|
|
|
2013
|
|
|
|
|
Commercial Licensing
|
|
$
|
19,099
|
|
|
$
|
18,460
|
|
Commercial Other
|
|
|
3,934
|
|
|
|
2,272
|
|
Rest of the segments
|
|
|
2,125
|
|
|
|
1,667
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,158
|
|
|
$
|
22,399
|
|
|
|
|
|
|
|
|
|
|
82
PART II
Item 8
NOTE 15 OTHER LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2014
|
|
|
2013
|
|
|
|
|
Tax contingencies and other tax liabilities
|
|
$
|
10,510
|
|
|
$
|
9,548
|
|
Other
|
|
|
1,084
|
|
|
|
452
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,594
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
NOTE 16 COMMITMENTS AND GUARANTEES
Construction and Operating Leases
We have committed $880 million for constructing new buildings, building improvements, and leasehold improvements as of June 30, 2014.
We have operating leases for most U.S. and international sales and support offices, research and development facilities, manufacturing facilities, and certain equipment. Rental expense for facilities operating
leases was $874 million, $711 million, and $639 million, in fiscal years 2014, 2013, and 2012, respectively. Future minimum rental commitments under non-cancellable facilities operating leases in place as of June 30, 2014 are as follows:
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Year Ending June 30,
|
|
|
|
|
|
|
2015
|
|
$
|
878
|
|
2016
|
|
|
748
|
|
2017
|
|
|
671
|
|
2018
|
|
|
598
|
|
2019
|
|
|
456
|
|
Thereafter
|
|
|
1,063
|
|
|
|
Total
|
|
$
|
4,414
|
|
|
|
|
|
|
Indemnifications
We provide indemnifications of varying scope and size to certain customers against claims of intellectual property infringement made by third parties arising from the use of our products and certain other matters.
We evaluate estimated losses for these indemnifications, and we consider such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, we have not encountered
significant costs as a result of these obligations and have not accrued any liabilities related to these indemnifications in our consolidated financial statements.
NOTE 17 CONTINGENCIES
Antitrust, Unfair Competition, and Overcharge Class Actions
A large number of antitrust and unfair competition class action lawsuits were filed against us in various state, federal, and Canadian courts on behalf of various classes of direct and indirect purchasers of our PC
operating system and certain other software products between 1999 and 2005.
We obtained dismissals or reached settlements of all claims
made in the United States. Under the settlements, generally class members can obtain vouchers that entitle them to be reimbursed for purchases of a wide variety of platform-neutral computer hardware and software. The total value of vouchers that we
may issue varies by state. We will make available to certain schools a percentage of those vouchers that are not issued or claimed (one-half to two-
83
PART II
Item 8
thirds depending on the state). The total value of vouchers we ultimately issue will depend on the number of class members who make claims and are issued vouchers. We estimate the total remaining
cost of the settlements is approximately $400 million, all of which had been accrued as of June 30, 2014.
Three similar cases
pending in British Columbia, Ontario, and Quebec, Canada have not been settled. In March 2010, the court in the British Columbia case certified it as a class action. The plaintiffs successfully appealed a British Columbia Court of Appeal decision
reversing class certification and dismissing the case. In October 2013, the Canadian Supreme Court reversed the appellate court and reinstated part of the British Columbia case, which is now scheduled for trial in September 2015. The other two cases
were inactive pending action by the Supreme Court on the British Columbia case.
Other Antitrust Litigation and Claims
Novell litigation
In November 2004,
Novell, Inc. (Novell) filed a complaint in U.S. District Court for the District of Utah (later transferred to federal court in Maryland), asserting antitrust and unfair competition claims against us related to Novells ownership of
WordPerfect and other productivity applications during the period between June 1994 and March 1996. After the trial court dismissed or granted summary judgment on a number of Novells claims, trial of the one remaining claim took place in late
2011 and resulted in a mistrial. In July 2012, the trial court granted Microsofts motion for judgment as a matter of law. Novell appealed this decision to the U.S. Court of Appeals for the Tenth Circuit, which affirmed the trial courts
decision in September 2013. The Supreme Court denied Novells petition for review in April 2014.
Go Computer litigation
In June 2005, GO Computer Inc. and co-founder Jerry Kaplan filed a complaint in California state court asserting antitrust claims under the
Cartwright Act related to the business of the former GO Corporation in the early 1990s and its successor in interest, Lucent Corporation in the early 2000s. All claims prior to June 2001 have been dismissed with prejudice as barred by the statute of
limitations. After a mini-trial on standing issues, the case is now moving forward with discovery, and a trial is set for September 2015.
China
State Administration for Industry and Commerce investigation
On July 28, 2014, Microsoft was informed that Chinas State
Administration for Industry and Commerce (SAIC) had begun a formal investigation relating to Chinas Anti-Monopoly Law, and the SAIC conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. SAIC has stated
the investigation relates to compatibility, bundle sales, and file verification issues related to Windows and Office software.
Patent and
Intellectual Property Claims
Motorola litigation
In October 2010, Microsoft filed patent infringement complaints against Motorola Mobility (Motorola) with the International Trade Commission (ITC) and in U.S. District Court in Seattle for
infringement of nine Microsoft patents by Motorolas Android devices. Since then, Microsoft and Motorola have filed additional claims against each other with the ITC, in federal district courts in Seattle, Wisconsin, Florida, and California,
and in courts in Germany and the United Kingdom. The nature of the claims asserted and status of individual matters are summarized below.
International Trade Commission
In May
2012, the ITC issued a limited exclusion order against Motorola on one Microsoft patent, which became effective in July 2012 and was affirmed on appeal in December 2013. In July 2013, Microsoft filed an action in U.S. District Court in
Washington, D.C. seeking an order to compel enforcement of the ITCs May 2012 import ban against infringing Motorola products by the Bureau of Customs and Border Protection (CBP), after learning that CBP had failed to fully enforce
the order.
84
PART II
Item 8
In November 2010, Motorola filed an action against Microsoft with the ITC alleging infringement of
five Motorola patents by Xbox consoles and accessories and seeking an exclusion order to prohibit importation of the allegedly infringing Xbox products. At Motorolas request, the ITC terminated its investigation of four Motorola patents. In
March 2013, the ITC affirmed there was no violation of the remaining Motorola patent. Motorola appealed the ITCs decision to the U.S. Court of Appeals for the Federal Circuit.
U.S. District Court
The Seattle District Court case filed in October 2010 by Microsoft as a
companion to Microsofts ITC case against Motorola was stayed pending the outcome of the ITC case.
In November 2010, Microsoft
sued Motorola for breach of contract in U.S. District Court in Seattle, alleging that Motorola breached its commitments to standards-setting organizations to license to Microsoft certain patents on reasonable and non-discriminatory
(RAND) terms and conditions. Motorola has declared these patents essential to the implementation of the H.264 video standard and the 802.11 Wi-Fi standard. In the Motorola ITC case described above and in suits described below, Motorola
or a Motorola affiliate subsequently sued Microsoft on those patents in U.S. District Courts, in the ITC, and in Germany. In February 2012, the Seattle District Court granted a partial summary judgment in favor of Microsoft ruling that
(1) Motorola had committed to standards organizations to license its declared-essential patents on RAND terms and conditions; and (2) Microsoft is a third-party beneficiary of those commitments. After trial, the Seattle District Court set
per unit royalties for Motorolas H.264 and 802.11 patents, which resulted in an immaterial Microsoft liability. In September 2013, following trial of Microsofts breach of contract claim, a jury awarded $14.5 million in damages to
Microsoft. Motorola appealed.
Cases filed by Motorola in Wisconsin, California, and Florida, with the exception of one currently stayed
case in Wisconsin (a companion case to Motorolas ITC action), have been transferred to the U.S District Court in Seattle. Motorola and Microsoft both seek damages as well as injunctive relief. The court has stayed these cases on agreement of
the parties.
|
|
|
In the transferred cases, Motorola asserts 15 patents are infringed by a range of Microsoft products including mobile and PC operating system, productivity,
server, communication, browser and gaming products.
|
|
|
|
In the Motorola action originally filed in California, Motorola asserts Microsoft violated antitrust laws in connection with Microsofts assertion of
patents against Motorola that Microsoft agreed to license to certain qualifying entities on RAND terms and conditions.
|
|
|
|
In counterclaims, Microsoft asserts 14 patents are infringed by Motorola Android devices and certain Motorola digital video recorders.
|
Germany
In
July 2011, Motorola filed patent infringement actions in Germany against Microsoft and several Microsoft subsidiaries.
|
|
|
Motorola asserts two patents (one now expired) are essential to implementation of the H.264 video standard, and Motorola alleges that H.264 capable products
including Xbox 360, Windows 7, Media Player, and Internet Explorer infringe those patents. In May 2012, the court issued an injunction relating to all H.264 capable Microsoft products in Germany, which Microsoft appealed. Orders in the litigation
pending in Seattle, Washington described above enjoin Motorola from enforcing the German injunction.
|
|
|
|
Motorola asserts that one patent covers certain syncing functionality in the ActiveSync protocol employed by Windows Phone 7, Outlook Mobile, Hotmail Mobile,
Exchange Online, Exchange Server, and Hotmail Server. In April 2013, the court stayed the case pending the outcome of parallel proceedings in which Microsoft is seeking to invalidate the patent. In November 2013, the Federal Patent Court invalidated
the originally issued patent claims, but ruled that certain new amended claims were patentable. Both Motorola and Microsoft appealed. In June 2014, the court reopened infringement proceedings and scheduled a hearing in November 2014.
|
|
|
|
Microsoft may be able to mitigate the adverse impact of any injunction by altering its products to avoid Motorolas infringement claims.
|
|
|
|
Any damages would be determined in separate proceedings.
|
85
PART II
Item 8
In lawsuits Microsoft filed in Germany in 2011 and 2012, Microsoft asserts that Motorola Android
devices infringe Microsoft patents and is seeking damages and injunctions. In 2012, regional courts in Germany issued injunctions on three of the Microsoft patents, which Motorola appealed. One judgment has been affirmed on appeal (and Motorola has
further appealed), and the other two appeals are pending. In actions filed separately by Motorola to invalidate these patents, the Federal Patent Court in 2013 and 2014 held the Microsoft patents invalid, and Microsoft appealed. For the cases in
which Microsoft obtained injunctions, if Motorola were to prevail following all appeals, Motorola could have a claim against Microsoft for damages caused by an erroneously granted injunction.
United Kingdom
In December 2011, Microsoft filed an action against Motorola in the High Court
of Justice, Chancery Division, Patents Court, in London, England, seeking to revoke the UK part of the European patent asserted by Motorola in Germany against the ActiveSync protocol. In February 2012, Motorola counterclaimed alleging infringement
of the patent and seeking damages and an injunction. In December 2012, the court ruled that Motorolas patent is invalid. The court also ruled that the patent, even if valid, would be licensed under the grant-back clause in Googles
ActiveSync license. Motorola appealed and the appeals court affirmed the lower courts ruling in Microsofts favor in November 2013. Motorola has exhausted all appeals and the rulings in Microsofts favor are final.
IPCom patent litigation
IPCom
GmbH & Co. is a German company that holds a large portfolio of mobile technology related patents spanning about 170 patent families and addressing a broad range of cellular technologies. IPCom has asserted 19 of these patents in litigation
against Nokia and many of the leading cell phone companies and operators. Three of the infringement suits against Nokia (now assumed by Microsoft through the NDS acquisition) are still pending in courts in Germany, England, and Italy. These courts
have held a number of IPComs patents were invalid or not infringed. We continue to contest the validity or infringement of the patents remaining in dispute.
Interdigital patent litigation
InterDigital Technology Corporation and InterDigital
Communications Corporation (collectively, IDT) filed four patent infringement cases against Nokia in the ITC and in U.S. District Court for the District of Delaware between 2007 and 2013. We are being substituted for Nokia in these
cases. Each case includes other co-defendants because most of the patents at issue allegedly relate to 3G and 4G wireless communications standards essential functionality. The suite of cases include three ITC investigations where IDT is seeking an
order excluding importation of 3G and 4G phones into the U.S. and one active case in U.S. District Court in Delaware seeking an injunction and damages.
European copyright levies
We have assumed
from Nokia all potential liability due to Nokias alleged failure to pay private copying levies in various European countries based upon sale of memory cards and mobile phones that incorporate blank memory. The levies are based
upon a 2001 EU Directive establishing a right for end users to make copies of copyrighted works for personal or private use, but also allowing the collection of levies based upon sales of blank media or recording devices to compensate copyright
holders for private copying. Various collecting societies in EU countries initiated litigation against Nokia, stating that Nokia must pay levies not only based upon sales of blank memory cards, but also phones that include blank memory for data
storage on the phones, regardless of actual usage of that memory. The most significant cases against Nokia are pending in Germany and Austria, due to both high volume of sales and high levy amounts sought in these countries. We are
litigating against certain collecting societies on the basis that the levy schemes exceed what the EU Directive and European Court of Justice decisions permit.
Other patent and intellectual property claims
In addition to these cases, there are
approximately 90 other patent infringement cases pending against Microsoft.
86
PART II
Item 8
Product-Related Litigation
U.S. cell phone litigation
Nokia, along with other handset manufacturers and network
operators, is a defendant in 19 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We have
assumed responsibility for these claims as part of the NDS acquisition. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining ten cases are stayed. In a separate 2009 decision, the Court of
Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (FCC Guidelines) are
pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the
science and testing around emission guidelines. In September 2013, defendants in the consolidated cases moved to exclude plaintiffs expert evidence of general causation on the basis of flawed scientific methodologies. The motion was heard in
December 2013 and January 2014. In March 2014, defendants filed a separate motion to preclude plaintiffs general causation testimony on the ground that it is pre-empted by federal law because the experts challenge the safety of all cellular
handsets, including those that comply with the FCC Guidelines. Both motions are pending.
Canadian cell phone class action
Nokia, along with other handset manufacturers and network operators, is a defendant in a 2013 class action lawsuit filed in the Supreme Court of
British Columbia by a purported class of Canadians who have used cellular phones for at least 1600 hours, including a subclass of users with brain tumors. Microsoft was served with the complaint in June 2014. The litigation is not yet active as
several defendants remain to be served.
Other
We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually
or in aggregate, will not have a material adverse impact on our consolidated financial statements, these matters are subject to inherent uncertainties and managements view of these matters may change in the future.
As of June 30, 2014, we had accrued aggregate liabilities of $780 million in other current liabilities and $81 million in other long-term
liabilities for all of our legal matters that were contingencies as of that date. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $2.0 billion in aggregate beyond recorded amounts are
reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on our consolidated financial statements for the period in which the effects become reasonably estimable. Substantially all
changes from the prior quarter in these accruals and estimates are attributable to matters involving Nokia that we assumed as a result of the NDS acquisition.
NOTE 18 STOCKHOLDERS EQUITY
Shares Outstanding
Shares of common stock outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Balance, beginning of year
|
|
|
8,328
|
|
|
|
8,381
|
|
|
|
8,376
|
|
Issued
|
|
|
86
|
|
|
|
105
|
|
|
|
147
|
|
Repurchased
|
|
|
(175
|
)
|
|
|
(158
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
8,239
|
|
|
|
8,328
|
|
|
|
8,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
PART II
Item 8
Share Repurchases
On September 16, 2013, our Board of Directors approved a new share repurchase program authorizing up to $40.0 billion in share repurchases. The share repurchase program became effective on October 1,
2013, has no expiration date, and may be suspended or discontinued at any time without notice. This new share repurchase program replaced the share repurchase program that was announced on September 22, 2008 and expired on September 30,
2013. As of June 30, 2014, $35.1 billion remained of our $40.0 billion share repurchase program. All repurchases were made using cash resources.
We repurchased the following shares of common stock under the above-described repurchase plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
(a)
|
|
|
2013
(b)
|
|
|
2012
(b)
|
|
|
|
|
|
|
|
|
First quarter
|
|
|
47
|
|
|
$
|
1,500
|
|
|
|
33
|
|
|
$
|
1,000
|
|
|
|
38
|
|
|
$
|
1,000
|
|
Second quarter
|
|
|
53
|
|
|
|
2,000
|
|
|
|
58
|
|
|
|
1,607
|
|
|
|
39
|
|
|
|
1,000
|
|
Third quarter
|
|
|
47
|
|
|
|
1,791
|
|
|
|
36
|
|
|
|
1,000
|
|
|
|
31
|
|
|
|
1,000
|
|
Fourth quarter
|
|
|
28
|
|
|
|
1,118
|
|
|
|
31
|
|
|
|
1,000
|
|
|
|
34
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
175
|
|
|
$
|
6,409
|
|
|
|
158
|
|
|
$
|
4,607
|
|
|
|
142
|
|
|
$
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Of the 175 million shares repurchased in fiscal year 2014, 128 million shares were repurchased for $4.9 billion under the share repurchase
program approved by our Board of Directors on September 16, 2013 and 47 million shares were repurchased for $1.5 billion under the share repurchase program that was announced on September 22, 2008 and expired on September 30,
2013.
|
(b)
|
All shares repurchased in fiscal years 2013 and 2012 were repurchased under the repurchase plan that was announced on September 22, 2008 and expired
on September 30, 2013.
|
The above table excludes shares repurchased to settle statutory employee tax
withholding related to the vesting of stock awards.
Dividends
In fiscal year 2014, our Board of Directors declared the following dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend
Per Share
|
|
|
Record Date
|
|
|
Total Amount
|
|
|
Payment Date
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
September 16, 2013
|
|
|
$ 0.28
|
|
|
|
November 21, 2013
|
|
|
|
$ 2,332
|
|
|
|
December 12, 2013
|
|
November 19, 2013
|
|
|
$ 0.28
|
|
|
|
February 20, 2014
|
|
|
|
$ 2,322
|
|
|
|
March 13, 2014
|
|
March 11, 2014
|
|
|
$ 0.28
|
|
|
|
May 15, 2014
|
|
|
|
$ 2,309
|
|
|
|
June 12, 2014
|
|
June 10, 2014
|
|
|
$ 0.28
|
|
|
|
August 21, 2014
|
|
|
|
$ 2,307
|
|
|
|
September 11, 2014
|
|
|
|
The dividend declared on June 10, 2014 will be paid after the filing date of this Form 10-K and was included
in other current liabilities as of June 30, 2014.
In fiscal year 2013, our Board of Directors declared the following dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend
Per Share
|
|
|
Record Date
|
|
|
Total Amount
|
|
|
Payment Date
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
September 18, 2012
|
|
$
|
0.23
|
|
|
|
November 15, 2012
|
|
|
$
|
1,933
|
|
|
|
December 13, 2012
|
|
November 28, 2012
|
|
$
|
0.23
|
|
|
|
February 21, 2013
|
|
|
$
|
1,925
|
|
|
|
March 14, 2013
|
|
March 11, 2013
|
|
$
|
0.23
|
|
|
|
May 16, 2013
|
|
|
$
|
1,921
|
|
|
|
June 13, 2013
|
|
June 12, 2013
|
|
$
|
0.23
|
|
|
|
August 15, 2013
|
|
|
$
|
1,916
|
|
|
|
September 12, 2013
|
|
|
|
The dividend declared on June 12, 2013 was included in other current liabilities as of June 30, 2013.
88
PART II
Item 8
NOTE 19 ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in accumulated other comprehensive income by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) balance, beginning of period
|
|
$
|
66
|
|
|
$
|
92
|
|
|
$
|
(163
|
)
|
Unrealized gains (losses), net of tax effects of
$2
, $54 and $127
|
|
|
63
|
|
|
|
101
|
|
|
|
236
|
|
Reclassification adjustments for losses (gains) included in revenue
|
|
|
(104
|
)
|
|
|
(195
|
)
|
|
|
29
|
|
Tax expense (benefit) included in provision for income taxes
|
|
|
6
|
|
|
|
68
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(98
|
)
|
|
|
(127
|
)
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
(35
|
)
|
|
|
(26
|
)
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income balance, end of period
|
|
$
|
31
|
|
|
$
|
66
|
|
|
$
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income balance, beginning of period
|
|
$
|
1,794
|
|
|
$
|
1,431
|
|
|
$
|
1,821
|
|
Unrealized gains (losses), net of tax effects of
$1,067
, $244 and $(93)
|
|
|
2,053
|
|
|
|
453
|
|
|
|
(172
|
)
|
Reclassification adjustments for gains included in other income (expense)
|
|
|
(447
|
)
|
|
|
(139
|
)
|
|
|
(335
|
)
|
Tax expense included in provision for income taxes
|
|
|
131
|
|
|
|
49
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(316
|
)
|
|
|
(90
|
)
|
|
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
1,737
|
|
|
|
363
|
|
|
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income balance, end of period
|
|
$
|
3,531
|
|
|
$
|
1,794
|
|
|
$
|
1,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation Adjustments and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) balance, beginning of period
|
|
$
|
(117
|
)
|
|
$
|
(101
|
)
|
|
$
|
205
|
|
Translation adjustments and other, net of tax effects of
$12
, $(8) and $(165)
|
|
|
263
|
|
|
|
(16
|
)
|
|
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss balance, end of period
|
|
$
|
146
|
|
|
$
|
(117
|
)
|
|
$
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, end of period
|
|
$
|
3,708
|
|
|
$
|
1,743
|
|
|
$
|
1,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 20 EMPLOYEE STOCK AND SAVINGS PLANS
We grant stock-based compensation to directors and employees. At June 30, 2014, an aggregate of 346 million shares
were authorized for future grant under our stock plans, covering stock options, stock awards, and leadership stock awards. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We
issue new shares of Microsoft common stock to satisfy exercises and vesting of awards granted under all of our stock plans.
Stock-based
compensation expense and related income tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
2,446
|
|
|
$
|
2,406
|
|
|
$
|
2,244
|
|
Income tax benefits related to stock-based compensation
|
|
$
|
830
|
|
|
$
|
842
|
|
|
$
|
785
|
|
|
|
Stock Plans
Stock
awards
Stock awards (SAs) are grants that entitle the holder to shares of Microsoft common stock as the award vests.
SAs generally vest over a four or five-year period.
89
PART II
Item 8
Executive incentive plan
Under the Executive Incentive Plan (EIP), the Compensation Committee awards performance-based compensation comprising both cash and SAs to executive officers and certain senior executives. For executive
officers, their awards are based on an aggregate incentive pool equal to a percentage of consolidated operating income. For fiscal years 2014, 2013, and 2012, the pool was 0.44%, 0.35%, and 0.30% of operating income, respectively. The SAs vest
ratably in August of each of the four years following the grant date. The final cash awards will be determined after each performance period based on individual and business performance.
Activity for all stock plans
The fair value of each award was estimated on the date of grant
using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Dividends per share (quarterly amounts)
|
|
$
|
0.23 - $ 0.28
|
|
|
$
|
0.20 - $ 0.23
|
|
|
$
|
0.16 - $ 0.20
|
|
Interest rates range
|
|
|
1.3% - 1.8%
|
|
|
|
0.6% - 1.1%
|
|
|
|
0.7% - 1.7%
|
|
|
|
During fiscal year 2014, the following activity occurred under our stock plans:
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance, beginning of year
|
|
|
273
|
|
|
$
|
25.50
|
|
Granted
(a)
|
|
|
103
|
|
|
$
|
31.50
|
|
Vested
|
|
|
(93
|
)
|
|
$
|
25.12
|
|
Forfeited
|
|
|
(24
|
)
|
|
$
|
27.01
|
|
|
|
|
|
|
|
Nonvested balance, end of year
|
|
|
259
|
|
|
$
|
27.88
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes four million shares in stock replacement awards related to the acquisition of NDS. The weighted average grant-date fair value was $37.64.
|
As of June 30, 2014, there was approximately $5.2 billion of total unrecognized compensation costs related
to stock awards. These costs are expected to be recognized over a weighted average period of 3 years.
During fiscal years 2013 and
2012, the following activity occurred under our stock plans:
|
|
|
|
|
|
|
|
|
(In millions, except fair values)
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
Awards granted
|
|
|
104
|
|
|
|
110
|
|
Weighted average grant-date fair value
|
|
$
|
28.37
|
|
|
$
|
24.60
|
|
|
|
Total vest-date fair value of stock awards vested was $3.2 billion, $2.8 billion, and $2.4 billion, for fiscal
years 2014, 2013, and 2012, respectively.
90
PART II
Item 8
Employee Stock Purchase Plan
We have an employee stock purchase plan (the Plan) for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the
last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period. Employees purchased the following shares during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Shares purchased
|
|
|
18
|
|
|
|
20
|
|
|
|
20
|
|
Average price per share
|
|
$
|
33.60
|
|
|
$
|
26.81
|
|
|
$
|
25.03
|
|
|
|
At June 30, 2014, 173 million shares of our common stock were reserved for future issuance through the
Plan.
Savings Plan
We have a
savings plan in the U.S. that qualifies under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Participating U.S. employees may contribute up to 75% of their salary, but not more than
statutory limits. We contribute fifty cents for each dollar of the first 6% a participant contributes in this plan, with a maximum contribution of the lesser of 3% of a participants earnings or 3% of the IRS compensation limit for the given
year. Matching contributions for all plans were $420 million, $393 million, and $373 million in fiscal years 2014, 2013, and 2012, respectively, and were expensed as contributed. Matching contributions are invested proportionate to each
participants voluntary contributions in the investment options provided under the plan. Investment options in the U.S. plan include Microsoft common stock, but neither participant nor our matching contributions are required to be invested in
Microsoft common stock.
NOTE 21 SEGMENT INFORMATION AND GEOGRAPHIC DATA
In its operation of the business, management, including our chief operating decision maker, the companys Chief Executive
Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with U.S. GAAP. The segment information in this note is reported on that basis.
During the first quarter of fiscal year 2014, we changed our organizational structure as part of our transformation to a devices and services
company. As a result, information that our chief operating decision maker regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, beginning in fiscal year 2014, we reported our financial performance based
on our new segments; D&C Licensing, D&C Hardware, D&C Other, Commercial Licensing, and Commercial Other. We have recast certain prior period amounts to conform to the way we internally managed and monitored segment performance during
fiscal year 2014.
On April 25, 2014, we acquired substantially all of NDS. See Note 9 Business Combinations for additional
details. NDS has been included in our consolidated results of operations starting on the acquisition date. We report the financial performance of the acquired business in our new Phone Hardware segment. Prior to the acquisition of NDS, financial
results associated with our joint strategic initiatives with Nokia were reflected in our D&C Licensing segment. The contractual relationship with Nokia related to those initiatives terminated in conjunction with the acquisition. With the
creation of the new Phone Hardware segment, the D&C Hardware segment was renamed Computing and Gaming Hardware in the fourth quarter of fiscal year 2014.
Our reportable segments are described below.
91
PART II
Item 8
Devices and Consumer
Our D&C segments develop, manufacture, market, and support products and services designed to entertain and connect people, increase personal productivity, help people simplify tasks and make more informed
decisions online, and help advertisers connect with audiences. Our D&C segments are:
|
|
|
D&C Licensing
, comprising: Windows, including all OEM licensing (Windows OEM) and other non-volume licensing and academic volume
licensing of the Windows operating system and related software; non-volume licensing of Microsoft Office, comprising the core Office product set, for consumers (Office Consumer); Windows Phone operating system, including related patent
licensing; and certain other patent licensing revenue;
|
|
|
|
Computing and Gaming Hardware
, comprising: Xbox gaming and entertainment consoles and accessories, second-party and third-party video game royalties,
and Xbox Live subscriptions (Xbox Platform); Surface devices and accessories; and Microsoft PC accessories;
|
|
|
|
Phone Hardware
, comprising: Lumia Smartphones and other non-Lumia phones, beginning with the acquisition of NDS; and
|
|
|
|
D&C Other
, comprising: Resale, including Windows Store, Xbox Live transactions, and Windows Phone Store; search advertising; display advertising;
Office 365 Consumer, comprising Office 365 Home and Office 365 Personal; Studios, comprising first-party video games; our retail stores; and certain other consumer products and services not included in the categories above.
|
Commercial
Our Commercial segments develop, market, and support software and services designed to increase individual, team, and organizational productivity
and efficiency, including simplifying everyday tasks through seamless operations across the users hardware and software. Our Commercial segments are:
|
|
|
Commercial Licensing
, comprising: server products, including Windows Server, Microsoft SQL Server, Visual Studio, System Center, and related Client
Access Licenses (CALs); Windows Embedded; volume licensing of the Windows operating system, excluding academic (Windows Commercial); Microsoft Office for business, including Office, Exchange, SharePoint, Lync, and related
CALs (Office Commercial); Microsoft Dynamics business solutions, excluding Dynamics CRM Online; and Skype; and
|
|
|
|
Commercial Other
, comprising: Enterprise Services, including Premier Support Services and Microsoft Consulting Services; Commercial Cloud, comprising
Office 365 Commercial, other Microsoft Office online offerings, Dynamics CRM Online, and Microsoft Azure; and certain other commercial products and online services not included in the categories above.
|
Revenue and cost of revenue are generally directly attributed to our segments. Certain revenue contracts are allocated among the segments based on
the relative value of the underlying products and services. Cost of revenue is directly charged to our hardware segments. For the remaining segments, cost of revenue is directly charged in most cases and allocated in certain cases, generally using a
relative revenue methodology.
We do not allocate operating expenses to our segments. Rather, we allocate them to our two segment
groups, Devices and Consumer and Commercial. Due to the integrated structure of our business, allocations of expenses are made in certain cases to incent cross-collaboration among our segment groups so that a segment group is not solely burdened by
the cost of a mutually beneficial activity as we seek to deliver seamless experiences across devices, whether on-premises or in the cloud.
Operating expenses are attributed to our segment groups as follows:
|
|
|
Sales and marketing expenses are primarily recorded directly to each segment group based on identified customer segment.
|
|
|
|
Research and development expenses are primarily shared across the segment groups based on relative gross margin but are mapped directly in certain cases where
the value of the expense only accrues to that segment group.
|
92
PART II
Item 8
|
|
|
General and administrative expenses are primarily allocated based on relative gross margin.
|
Certain corporate-level activity is not allocated to our segment groups, including costs of: legal, including expenses, settlements, and fines;
information technology; human resources; finance; excise taxes; and integration and restructuring costs.
Segment revenue and gross
margin were as follows during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Devices and Consumer
|
|
Licensing
|
|
$
|
18,803
|
|
|
$
|
19,021
|
|
|
$
|
19,495
|
|
|
|
Hardware:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Gaming Hardware
|
|
|
9,628
|
|
|
|
6,461
|
|
|
|
6,740
|
|
|
|
Phone Hardware
|
|
|
1,985
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total D&C Hardware
|
|
|
11,613
|
|
|
|
6,461
|
|
|
|
6,740
|
|
|
|
Other
|
|
|
7,258
|
|
|
|
6,618
|
|
|
|
6,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Devices and Consumer
|
|
|
37,674
|
|
|
|
32,100
|
|
|
|
32,438
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Licensing
|
|
|
42,027
|
|
|
|
39,686
|
|
|
|
37,126
|
|
|
|
Other
|
|
|
7,547
|
|
|
|
5,660
|
|
|
|
4,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial
|
|
|
49,574
|
|
|
|
45,346
|
|
|
|
41,770
|
|
Corporate and Other
|
|
|
|
|
(415
|
)
|
|
|
403
|
|
|
|
(485
|
)
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
$
|
86,833
|
|
|
$
|
77,849
|
|
|
$
|
73,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Devices and Consumer
|
|
Licensing
|
|
$
|
17,216
|
|
|
$
|
17,044
|
|
|
$
|
17,240
|
|
|
|
Hardware:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computing and Gaming Hardware
|
|
|
893
|
|
|
|
956
|
|
|
|
2,495
|
|
|
|
Phone Hardware
|
|
|
54
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total D&C Hardware
|
|
|
947
|
|
|
|
956
|
|
|
|
2,495
|
|
|
|
Other
|
|
|
1,770
|
|
|
|
2,046
|
|
|
|
1,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Devices and Consumer
|
|
|
19,933
|
|
|
|
20,046
|
|
|
|
21,733
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Licensing
|
|
|
38,604
|
|
|
|
36,261
|
|
|
|
34,463
|
|
|
|
Other
|
|
|
1,856
|
|
|
|
921
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial
|
|
|
40,460
|
|
|
|
37,182
|
|
|
|
35,042
|
|
Corporate and Other
|
|
|
|
|
(494
|
)
|
|
|
372
|
|
|
|
(582
|
)
|
|
|
|
|
|
|
|
|
|
|
Total gross margin
|
|
|
|
$
|
59,899
|
|
|
$
|
57,600
|
|
|
$
|
56,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following is operating expenses by segment group. As discussed above, we do not allocate operating expenses below
cost of revenue to our segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Devices and Consumer
|
|
$
|
11,219
|
|
|
$
|
10,625
|
|
|
$
|
15,682
|
|
Commercial
|
|
|
16,993
|
|
|
|
16,050
|
|
|
|
15,064
|
|
Corporate and Other
|
|
|
3,928
|
|
|
|
4,161
|
|
|
|
3,684
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
32,140
|
|
|
$
|
30,836
|
|
|
$
|
34,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
PART II
Item 8
Following is operating income (loss) by segment group.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Devices and Consumer
|
|
$
|
8,714
|
|
|
$
|
9,421
|
|
|
$
|
6,051
|
|
Commercial
|
|
|
23,467
|
|
|
|
21,132
|
|
|
|
19,978
|
|
Corporate and Other
|
|
|
(4,422
|
)
|
|
|
(3,789
|
)
|
|
|
(4,266
|
)
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
27,759
|
|
|
$
|
26,764
|
|
|
$
|
21,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other operating income includes adjustments to conform our internal accounting policies to U.S. GAAP
and corporate-level activity not specifically attributed to a segment. Significant internal accounting policies that differ from U.S. GAAP relate to revenue recognition, income statement classification, and depreciation.
Corporate and Other activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Corporate
(a)
|
|
$
|
(3,888
|
)
|
|
$
|
(4,236
|
)
|
|
$
|
(3,671
|
)
|
Other (adjustments to U.S. GAAP):
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue reconciling amounts
(b)
|
|
|
(415
|
)
|
|
|
403
|
|
|
|
(485
|
)
|
Cost of revenue reconciling amounts
|
|
|
(79
|
)
|
|
|
(31
|
)
|
|
|
(97
|
)
|
Operating expenses reconciling amounts
|
|
|
(40
|
)
|
|
|
75
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Corporate and Other
|
|
$
|
(4,422
|
)
|
|
$
|
(3,789
|
)
|
|
$
|
(4,266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Corporate is presented on the basis of our internal accounting policies and excludes the adjustments to U.S. GAAP that are presented separately in those
line items.
|
(b)
|
Revenue reconciling amounts for fiscal year 2014 included a net $349 million of revenue deferrals related to sales of certain devices bundled with other
products and services (Bundled Offerings). Revenue reconciling amounts for fiscal years 2012 and 2013 included the deferral and subsequent recognition, respectively, of $540 million of revenue related to the Windows Upgrade Offer.
|
No sales to an individual customer or country other than the United States accounted for more than 10% of fiscal
year 2014, 2013, or 2012 revenue. Revenue, classified by the major geographic areas in which our customers are located, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
United
States
(a)
|
|
$
|
43,474
|
|
|
$
|
41,344
|
|
|
$
|
38,846
|
|
Other countries
|
|
|
43,359
|
|
|
|
36,505
|
|
|
|
34,877
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
86,833
|
|
|
$
|
77,849
|
|
|
$
|
73,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the
geographic source of the revenue.
|
94
PART II
Item 8
Revenue from external customers, classified by significant product and service offerings were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
Microsoft Office system
|
|
$
|
24,323
|
|
|
$
|
22,995
|
|
|
$
|
22,299
|
|
Windows PC operating system
|
|
|
16,856
|
|
|
|
17,529
|
|
|
|
17,320
|
|
Server products and tools
|
|
|
17,055
|
|
|
|
15,408
|
|
|
|
14,232
|
|
Xbox Platform
|
|
|
8,643
|
|
|
|
7,100
|
|
|
|
8,045
|
|
Consulting and product support services
|
|
|
4,767
|
|
|
|
4,372
|
|
|
|
3,976
|
|
Advertising
|
|
|
4,016
|
|
|
|
3,387
|
|
|
|
3,181
|
|
Phone
|
|
|
3,073
|
|
|
|
615
|
|
|
|
162
|
|
Surface
|
|
|
1,883
|
|
|
|
853
|
|
|
|
0
|
|
Other
|
|
|
6,217
|
|
|
|
5,590
|
|
|
|
4,508
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
86,833
|
|
|
$
|
77,849
|
|
|
$
|
73,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our total Commercial Cloud revenue was $2.8 billion, $1.3 billion, and $0.7 billion in fiscal years 2014, 2013, and
2012, respectively. These amounts are included in their respective product categories in the table above.
Assets are not allocated to
segments for internal reporting presentations. A portion of amortization and depreciation is charged to the respective segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included
in the measure of segment profit or loss.
Long-lived assets, excluding financial instruments and tax assets, classified by the location
of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
United States
|
|
$
|
17,653
|
|
|
$
|
16,615
|
|
|
$
|
14,081
|
|
Finland
|
|
|
9,840
|
|
|
|
12
|
|
|
|
8
|
|
Luxembourg
|
|
|
6,913
|
|
|
|
6,943
|
|
|
|
6,975
|
|
Other countries
|
|
|
5,713
|
|
|
|
4,159
|
|
|
|
3,827
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,119
|
|
|
$
|
27,729
|
|
|
$
|
24,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 22 QUARTERLY INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
September 30
|
|
|
|
December 31
|
|
|
|
March 31
|
|
|
|
June 30
|
(a)
|
|
|
Total
|
(a)
|
|
|
|
|
|
|
Fiscal Year 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
$ 18,529
|
|
|
|
$ 24,519
|
|
|
|
$ 20,403
|
|
|
|
$ 23,382
|
|
|
|
$ 86,833
|
|
Gross margin
|
|
|
13,415
|
|
|
|
16,235
|
|
|
|
14,462
|
|
|
|
15,787
|
|
|
|
59,899
|
|
Net income
|
|
|
5,244
|
|
|
|
6,558
|
|
|
|
5,660
|
|
|
|
4,612
|
(b)
|
|
|
22,074
|
(b)
|
Basic earnings per share
|
|
|
0.63
|
|
|
|
0.79
|
|
|
|
0.68
|
|
|
|
0.56
|
|
|
|
2.66
|
|
Diluted earnings per share
|
|
|
0.62
|
|
|
|
0.78
|
|
|
|
0.68
|
|
|
|
0.55
|
(b)
|
|
|
2.63
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
$ 16,008
|
|
|
|
$ 21,456
|
|
|
|
$ 20,489
|
|
|
|
$ 19,896
|
|
|
|
$ 77,849
|
|
Gross margin
|
|
|
11,840
|
|
|
|
15,764
|
|
|
|
15,702
|
|
|
|
14,294
|
|
|
|
57,600
|
|
Net income
|
|
|
4,466
|
|
|
|
6,377
|
|
|
|
6,055
|
(c)
|
|
|
4,965
|
(d)
|
|
|
21,863
|
(e)
|
Basic earnings per share
|
|
|
0.53
|
|
|
|
0.76
|
|
|
|
0.72
|
|
|
|
0.59
|
|
|
|
2.61
|
|
Diluted earnings per share
|
|
|
0.53
|
|
|
|
0.76
|
|
|
|
0.72
|
(c)
|
|
|
0.59
|
(d)
|
|
|
2.58
|
(e)
|
|
|
(a)
|
NDS has been included in our consolidated results of operations starting on April 25, 2014, the date of acquisition.
|
(b)
|
Includes a tax provision adjustment recorded in the fourth quarter of fiscal year 2014 related to adjustments to prior years liabilities for
intercompany transfer pricing which decreased net income by $458 million and diluted earnings per share by $0.05.
|
95
PART II
Item 8
(c)
|
Includes a charge related to a fine imposed by the European Commission in March 2013 which decreased net income by $733 million (561 million) and
diluted earnings per share by $0.09.
|
(d)
|
Includes a charge for Surface RT inventory adjustments recorded in the fourth quarter of fiscal year 2013, which decreased net income by $596 million and
diluted earnings per share by $0.07.
|
(e)
|
Includes a charge related to a fine imposed by the European Commission in March 2013 which decreased net income by $733 million (561 million) and
diluted earnings per share by $0.09. Also includes a charge for Surface RT inventory adjustments recorded in the fourth quarter of fiscal year 2013, which decreased net income by $596 million and diluted earnings per share by $0.07.
|
NOTE 23 SUBSEQUENT EVENT
On July 17, 2014, we announced a restructuring plan to simplify our organization and align the recently acquired NDS
business with our companys overall strategy. We will eliminate up to 18,000 positions over the next year, including 12,500 professional and factory positions related to the acquisition of NDS. We expect to incur pre-tax charges of
approximately $1.1 billion to $1.6 billion in fiscal year 2015.
96
PART II
Item 8