NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 ACCOUNTING POLICIES
Accounting Principles
We prepare our unaudited interim consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In the opinion of management,
the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative
of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Microsoft Corporation 2016 Form 10-K filed with the U.S. Securities and Exchange Commission on
July 28, 2016.
We have recast certain prior period amounts to conform to the current period presentation, with no impact on
consolidated net income or cash flows.
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 impairment of goodwill and intangible assets, 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 and volume of demand for 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 on 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.
Product Revenue and Service and Other Revenue
Product revenue includes sales from operating systems; cross-device productivity applications; server applications; business solution applications; desktop and server management tools; software development tools;
video games; hardware such as PCs, tablets, gaming and entertainment consoles, phones, other intelligent devices, and related accessories; and training and certification of computer system integrators and developers.
Service and other revenue includes sales from cloud-based solutions that provide customers with software, services, platforms, and content such as
Office 365, Microsoft Azure (Azure), Microsoft Dynamics (Dynamics) CRM Online, and Xbox Live; solution support; and consulting services. Service and other revenue also includes sales from online advertising.
8
PART I
Item 1
Recent Accounting Guidance Not Yet Adopted
Financial Instruments Credit Losses
In June 2016, the Financial Accounting Standards
Board (FASB) issued a new standard to replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and
supportable information to inform credit loss estimates. For trade and other receivables, loans, and other financial instruments, we will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing
credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the
securities. The new standard will be effective for us beginning July 1, 2020, with early adoption permitted beginning July 1, 2019. Application of the amendments is through a cumulative-effect adjustment to retained earnings as of the
effective date. We are currently evaluating the impact of this standard on our consolidated financial statements.
Leases
In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the
recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the
new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to recognize and measure leases at the
beginning of the earliest period presented using a modified retrospective approach.
The new standard will be effective for us beginning
July 1, 2019, with early adoption permitted. We currently anticipate early adoption of the new standard effective July 1, 2017 in conjunction with our adoption of the new revenue standard. Our ability to early adopt is dependent on
system readiness, including software procured from third-party providers, and the completion of our analysis of information necessary to restate prior period financial statements.
We anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing to assess all potential
impacts of the standard, we currently believe the most significant impact relates to our accounting for office, retail, and datacenter operating leases.
Financial Instruments Recognition, Measurement, Presentation, and Disclosure
In January 2016, the FASB issued a new standard to amend certain aspects of recognition, measurement, presentation, and disclosure of financial
instruments. Most prominent among the amendments is the requirement for changes in the fair value of our equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income (OCI). The
new standard will be effective for us beginning July 1, 2018. The application of the amendments will result in a cumulative-effect adjustment to our consolidated balance sheets as of the effective date. We are currently evaluating the impact of
this standard on our consolidated financial statements.
Revenue from Contracts with Customers
In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, revenue is recognized when a customer obtains
control of promised goods or services and is recognized in an amount that reflects the consideration 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 FASB has recently issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying
performance obligations.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full
retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting the standard using
the full retrospective method to restate each prior reporting period presented.
The new standard will be effective for us beginning
July 1, 2018, and adoption as of the original effective date of July 1, 2017 is permitted. We currently anticipate early adoption of the new standard effective July 1, 2017. Our
9
PART I
Item 1
ability to early adopt using the full retrospective method is dependent on system readiness, including software procured from third-party providers, and the completion of our analysis of
information necessary to restate prior period financial statements.
We anticipate this standard will have a material impact on our
consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for software license revenue. We expect revenue related to
hardware, cloud offerings, and professional services to remain substantially unchanged. Specifically, under the new standard we expect to recognize Windows 10 revenue predominantly at the time of billing rather than ratably over the life of the
related device. We also expect to recognize license revenue at the time of billing rather than over the subscription period from certain multi-year commercial software subscriptions that include both software licenses and Software Assurance. Due to
the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms, and may vary in some instances from recognition at the
time of billing.
We currently believe that the net change in Windows 10 revenue from period to period is indicative of the net change
in revenue we expect from the adoption of the new standard.
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.
The components of basic and diluted EPS are as follows:
|
|
|
|
|
|
|
|
|
(In millions, except earnings per share)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
Net income available for common shareholders (A)
|
|
$
|
4,690
|
|
|
$
|
4,902
|
|
|
|
|
Weighted average outstanding shares of common stock (B)
|
|
|
7,789
|
|
|
|
7,996
|
|
Dilutive effect of stock-based awards
|
|
|
87
|
|
|
|
88
|
|
|
|
|
|
|
|
Common stock and common stock equivalents (C)
|
|
|
7,876
|
|
|
|
8,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
Basic (A/B)
|
|
$
|
0.60
|
|
|
$
|
0.61
|
|
Diluted (A/C)
|
|
$
|
0.60
|
|
|
$
|
0.61
|
|
|
|
Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods
presented.
NOTE 3 OTHER INCOME (EXPENSE), NET
The components of other income (expense), net were as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
Dividends and interest income
|
|
$
|
293
|
|
|
$
|
199
|
|
Interest expense
|
|
|
(437
|
)
|
|
|
(249
|
)
|
Net recognized gains on investments
|
|
|
405
|
|
|
|
2
|
|
Net losses on derivatives
|
|
|
(94
|
)
|
|
|
(103
|
)
|
Net losses on foreign currency remeasurements
|
|
|
(52
|
)
|
|
|
(36
|
)
|
Other
|
|
|
(15
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
Total
|
|
$
|
100
|
|
|
$
|
(280
|
)
|
|
|
|
|
|
|
|
|
|
10
PART I
Item 1
Following are details of net recognized gains (losses) on investments during the periods reported:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
Other-than-temporary impairments of investments
|
|
$
|
(18
|
)
|
|
$
|
(35
|
)
|
Realized gains from sales of available-for-sale securities
|
|
|
483
|
|
|
|
107
|
|
Realized losses from sales of available-for-sale securities
|
|
|
(60
|
)
|
|
|
(70
|
)
|
|
|
|
|
|
|
Total
|
|
$
|
405
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 INVESTMENTS
Investment Components
The components of investments, including associated derivatives, but
excluding held-to-maturity investments, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Cost Basis
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Recorded
Basis
|
|
|
Cash
and Cash
Equivalents
|
|
|
Short-term
Investments
|
|
|
Equity
and Other
Investments
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,473
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,473
|
|
|
$
|
3,473
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Mutual funds
|
|
|
1,516
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,516
|
|
|
|
1,516
|
|
|
|
0
|
|
|
|
0
|
|
Commercial paper
|
|
|
745
|
|
|
|
0
|
|
|
|
0
|
|
|
|
745
|
|
|
|
645
|
|
|
|
100
|
|
|
|
0
|
|
Certificates of deposit
|
|
|
1,304
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,304
|
|
|
|
1,128
|
|
|
|
176
|
|
|
|
0
|
|
U.S. government and agency securities
|
|
|
112,619
|
|
|
|
116
|
|
|
|
(34
|
)
|
|
|
112,701
|
|
|
|
6,916
|
|
|
|
105,785
|
|
|
|
0
|
|
Foreign government bonds
|
|
|
5,709
|
|
|
|
9
|
|
|
|
(18
|
)
|
|
|
5,700
|
|
|
|
250
|
|
|
|
5,450
|
|
|
|
0
|
|
Mortgage- and asset-backed securities
|
|
|
4,599
|
|
|
|
24
|
|
|
|
(1
|
)
|
|
|
4,622
|
|
|
|
0
|
|
|
|
4,622
|
|
|
|
0
|
|
Corporate notes and bonds
|
|
|
6,440
|
|
|
|
108
|
|
|
|
(18
|
)
|
|
|
6,530
|
|
|
|
0
|
|
|
|
6,530
|
|
|
|
0
|
|
Municipal securities
|
|
|
284
|
|
|
|
59
|
|
|
|
0
|
|
|
|
343
|
|
|
|
0
|
|
|
|
343
|
|
|
|
0
|
|
Common and preferred stock
|
|
|
5,395
|
|
|
|
4,639
|
|
|
|
(161
|
)
|
|
|
9,873
|
|
|
|
0
|
|
|
|
0
|
|
|
|
9,873
|
|
Other investments
|
|
|
585
|
|
|
|
0
|
|
|
|
0
|
|
|
|
585
|
|
|
|
0
|
|
|
|
(2
|
)
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
142,669
|
|
|
$
|
4,955
|
|
|
$
|
(232
|
)
|
|
$
|
147,392
|
|
|
$
|
13,928
|
|
|
$
|
123,004
|
|
|
$
|
10,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Cost Basis
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Recorded
Basis
|
|
|
Cash
and Cash
Equivalents
|
|
|
Short-term
Investments
|
|
|
Equity
and Other
Investments
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,501
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,501
|
|
|
$
|
3,501
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Mutual funds
|
|
|
1,012
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,012
|
|
|
|
1,012
|
|
|
|
0
|
|
|
|
0
|
|
Commercial paper
|
|
|
298
|
|
|
|
0
|
|
|
|
0
|
|
|
|
298
|
|
|
|
298
|
|
|
|
0
|
|
|
|
0
|
|
Certificates of deposit
|
|
|
1,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,000
|
|
|
|
868
|
|
|
|
132
|
|
|
|
0
|
|
U.S. government and agency securities
|
|
|
89,970
|
|
|
|
245
|
|
|
|
(11
|
)
|
|
|
90,204
|
|
|
|
100
|
|
|
|
90,104
|
|
|
|
0
|
|
Foreign government bonds
|
|
|
5,502
|
|
|
|
10
|
|
|
|
(18
|
)
|
|
|
5,494
|
|
|
|
731
|
|
|
|
4,763
|
|
|
|
0
|
|
Mortgage- and asset-backed securities
|
|
|
4,789
|
|
|
|
21
|
|
|
|
(2
|
)
|
|
|
4,808
|
|
|
|
0
|
|
|
|
4,808
|
|
|
|
0
|
|
Corporate notes and bonds
|
|
|
6,509
|
|
|
|
110
|
|
|
|
(35
|
)
|
|
|
6,584
|
|
|
|
0
|
|
|
|
6,584
|
|
|
|
0
|
|
Municipal securities
|
|
|
285
|
|
|
|
57
|
|
|
|
0
|
|
|
|
342
|
|
|
|
0
|
|
|
|
342
|
|
|
|
0
|
|
Common and preferred stock
|
|
|
5,597
|
|
|
|
4,452
|
|
|
|
(236
|
)
|
|
|
9,813
|
|
|
|
0
|
|
|
|
0
|
|
|
|
9,813
|
|
Other investments
|
|
|
590
|
|
|
|
0
|
|
|
|
0
|
|
|
|
590
|
|
|
|
0
|
|
|
|
(3
|
)
|
|
|
593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
119,053
|
|
|
$
|
4,895
|
|
|
$
|
(302
|
)
|
|
$
|
123,646
|
|
|
$
|
6,510
|
|
|
$
|
106,730
|
|
|
$
|
10,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
PART I
Item 1
As of September 30, 2016 and June 30, 2016, the recorded bases of common and preferred
stock that are restricted for more than one year or are not publicly traded were $802 million and $767 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.
We lend certain fixed-income and equity securities to
increase investment returns. These transactions are accounted for as secured borrowings and the loaned securities continue to be carried as investments on our consolidated balance sheets. 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. As of September 30, 2016 and June 30, 2016, the collateral received under agreements for loaned securities
totaled $210 million and $294 million, which is primarily comprised of U.S. government and agency securities.
Unrealized Losses on Investments
Investments 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
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
40,654
|
|
|
$
|
(26
|
)
|
|
$
|
379
|
|
|
$
|
(8
|
)
|
|
$
|
41,033
|
|
|
$
|
(34
|
)
|
Foreign government bonds
|
|
|
5,081
|
|
|
|
(1
|
)
|
|
|
38
|
|
|
|
(17
|
)
|
|
|
5,119
|
|
|
|
(18
|
)
|
Mortgage- and asset-backed securities
|
|
|
0
|
|
|
|
0
|
|
|
|
214
|
|
|
|
(1
|
)
|
|
|
214
|
|
|
|
(1
|
)
|
Corporate notes and bonds
|
|
|
920
|
|
|
|
(4
|
)
|
|
|
484
|
|
|
|
(14
|
)
|
|
|
1,404
|
|
|
|
(18
|
)
|
Common and preferred stock
|
|
|
523
|
|
|
|
(65
|
)
|
|
|
486
|
|
|
|
(96
|
)
|
|
|
1,009
|
|
|
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,178
|
|
|
$
|
(96
|
)
|
|
$
|
1,601
|
|
|
$
|
(136
|
)
|
|
$
|
48,779
|
|
|
$
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
5,816
|
|
|
$
|
(3
|
)
|
|
$
|
432
|
|
|
$
|
(8
|
)
|
|
$
|
6,248
|
|
|
$
|
(11
|
)
|
Foreign government bonds
|
|
|
3,452
|
|
|
|
(3
|
)
|
|
|
35
|
|
|
|
(15
|
)
|
|
|
3,487
|
|
|
|
(18
|
)
|
Mortgage- and asset-backed securities
|
|
|
844
|
|
|
|
(1
|
)
|
|
|
322
|
|
|
|
(1
|
)
|
|
|
1,166
|
|
|
|
(2
|
)
|
Corporate notes and bonds
|
|
|
1,180
|
|
|
|
(11
|
)
|
|
|
788
|
|
|
|
(24
|
)
|
|
|
1,968
|
|
|
|
(35
|
)
|
Common and preferred stock
|
|
|
896
|
|
|
|
(147
|
)
|
|
|
390
|
|
|
|
(89
|
)
|
|
|
1,286
|
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,188
|
|
|
$
|
(165
|
)
|
|
$
|
1,967
|
|
|
$
|
(137
|
)
|
|
$
|
14,155
|
|
|
$
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
12
PART I
Item 1
Debt Investment Maturities
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Cost Basis
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
48,954
|
|
|
$
|
48,970
|
|
Due after one year through five years
|
|
|
79,647
|
|
|
|
79,755
|
|
Due after five years through 10 years
|
|
|
1,745
|
|
|
|
1,788
|
|
Due after 10 years
|
|
|
1,354
|
|
|
|
1,432
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,700
|
|
|
$
|
131,945
|
|
|
|
|
|
|
|
|
|
|
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, Canadian dollar, and Australian
dollar. As of September 30, 2016 and June 30, 2016, the total notional amounts of these foreign exchange contracts sold were $8.5 billion and $8.4 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 September 30, 2016 and June 30, 2016, the total notional amounts of these foreign exchange contracts sold were $5.2 billion and $5.3 billion, respectively.
Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain
balance sheet amounts and to manage other foreign currency exposures. As of September 30, 2016, the total notional amounts of these foreign exchange contracts purchased and sold were $8.6 billion and $5.4 billion, respectively. As of
June 30, 2016, the total notional amounts of these foreign exchange contracts purchased and sold were $12.0 billion and $11.7 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 September 30, 2016, the total notional
amounts of equity contracts purchased and sold for managing market price risk were $1.8 billion and $2.5 billion, respectively, of which $737 million and $986 million, respectively, were designated as hedging instruments. As of June 30, 2016,
the total notional amounts of equity contracts purchased and sold for managing market price risk were $1.3 billion and $2.2 billion, respectively, of which $737 million and $986 million, respectively, 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 September 30, 2016, the total
13
PART I
Item 1
notional amounts of fixed-interest rate contracts purchased and sold were $327 million and $2.2 billion, respectively. As of June 30, 2016, the total notional amounts of fixed-interest rate
contracts purchased and sold were $328 million and $2.4 billion, 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 September 30, 2016 and June 30, 2016, the total notional derivative amounts of mortgage contracts purchased were $546 million and $548 million, respectively.
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 September 30, 2016, the total notional amounts of credit contracts purchased and sold were $384 million and $271 million, respectively. As of June 30,
2016, the total notional amounts of credit contracts purchased and sold were $440 million and $273 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 September 30, 2016, the total notional amounts of commodity contracts purchased and sold were $623 million and $195 million, respectively. As of June 30, 2016, the
total notional amounts of commodity contracts purchased and sold were $631 million and $162 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 September 30, 2016, 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.
Fair Values of Derivative Instruments
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 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), net. 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), net.
14
PART I
Item 1
The following table presents 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
Equity and
Other
Investments
|
|
|
Other
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-designated Hedge Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
$
|
12
|
|
|
$
|
134
|
|
|
$
|
0
|
|
|
$
|
(68
|
)
|
|
|
|
|
|
$
|
33
|
|
|
$
|
156
|
|
|
$
|
0
|
|
|
$
|
(296
|
)
|
Equity contracts
|
|
|
|
|
20
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
23
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(16
|
)
|
Interest rate contracts
|
|
|
|
|
5
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
10
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(25
|
)
|
Credit contracts
|
|
|
|
|
5
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
6
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(5
|
)
|
Commodity contracts
|
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
43
|
|
|
$
|
134
|
|
|
$
|
0
|
|
|
$
|
(88
|
)
|
|
|
|
|
|
$
|
72
|
|
|
$
|
156
|
|
|
$
|
0
|
|
|
$
|
(342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated Hedge Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
$
|
8
|
|
|
$
|
346
|
|
|
$
|
0
|
|
|
$
|
(71
|
)
|
|
|
|
|
|
$
|
1
|
|
|
$
|
392
|
|
|
$
|
0
|
|
|
$
|
(263
|
)
|
Equity contracts
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
8
|
|
|
$
|
346
|
|
|
$
|
8
|
|
|
$
|
(99
|
)
|
|
|
|
|
|
$
|
1
|
|
|
$
|
392
|
|
|
$
|
18
|
|
|
$
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross amounts of derivatives
|
|
|
|
$
|
51
|
|
|
$
|
480
|
|
|
$
|
8
|
|
|
$
|
(187
|
)
|
|
|
|
|
|
$
|
73
|
|
|
$
|
548
|
|
|
$
|
18
|
|
|
$
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross derivatives either offset or subject to an enforceable master netting agreement
|
|
|
|
$
|
50
|
|
|
$
|
480
|
|
|
$
|
8
|
|
|
$
|
(187
|
)
|
|
|
|
|
|
$
|
69
|
|
|
$
|
548
|
|
|
$
|
18
|
|
|
$
|
(630
|
)
|
Gross amounts of derivatives offset on the balance sheet
|
|
|
|
|
(54
|
)
|
|
|
(87
|
)
|
|
|
(23
|
)
|
|
|
161
|
|
|
|
|
|
|
|
(74
|
)
|
|
|
(302
|
)
|
|
|
(25
|
)
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts presented on the balance sheet
|
|
|
|
|
(4
|
)
|
|
|
393
|
|
|
|
(15
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
246
|
|
|
|
(7
|
)
|
|
|
(232
|
)
|
Gross amounts of derivatives not offset on the balance sheet
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Cash collateral received
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(245
|
)
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
|
|
$
|
(4
|
)
|
|
$
|
393
|
|
|
$
|
(15
|
)
|
|
$
|
(271
|
)
|
|
|
|
|
|
$
|
(5
|
)
|
|
$
|
246
|
|
|
$
|
(7
|
)
|
|
$
|
(482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See also Note 4 Investments and Note 6 Fair Value Measurements.
15
PART I
Item 1
Fair-Value Hedge Gains (Losses)
We recognized in other income (expense), net the following gains (losses) on contracts designated as fair-value hedges and their related hedged items:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
Foreign Exchange Contracts
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(48
|
)
|
|
$
|
(81
|
)
|
Hedged items
|
|
|
68
|
|
|
|
91
|
|
|
|
|
|
|
|
Total amount of ineffectiveness
|
|
$
|
20
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Contracts
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(10
|
)
|
|
$
|
(33
|
)
|
Hedged items
|
|
|
10
|
|
|
|
33
|
|
|
|
|
|
|
|
Total amount of ineffectiveness
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
Amount of equity contracts excluded from effectiveness assessment
|
|
$
|
(3
|
)
|
|
$
|
19
|
|
|
|
Cash Flow Hedge Gains (Losses)
We recognized the following gains (losses) on foreign exchange contracts designated as cash-flow hedges:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
Effective Portion
|
|
|
|
|
|
|
|
|
|
|
|
Gains recognized in other comprehensive income (net of tax effects of
$1
and $28)
|
|
$
|
35
|
|
|
$
|
161
|
|
Gains reclassified from accumulated other comprehensive income into revenue
|
|
$
|
75
|
|
|
$
|
109
|
|
|
|
|
Amount Excluded from Effectiveness Assessment and Ineffective Portion
|
|
|
|
|
|
|
|
|
|
|
|
Losses recognized in other income (expense), net
|
|
$
|
(70
|
)
|
|
$
|
(82
|
)
|
|
|
We estimate that $289 million of net derivative gains included in AOCI at September 30, 2016 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 the three months ended
September 30, 2016.
16
PART I
Item 1
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),
net. 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), net, 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 and gains (losses) from foreign
exchange rate changes on certain balance sheet amounts.
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(31
|
)
|
|
$
|
59
|
|
Equity contracts
|
|
|
(17
|
)
|
|
|
34
|
|
Interest-rate contracts
|
|
|
4
|
|
|
|
(1
|
)
|
Credit contracts
|
|
|
2
|
|
|
|
(5
|
)
|
Commodity contracts
|
|
|
(22
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
Total
|
|
$
|
(64
|
)
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 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:
|
|
|
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.
|
|
|
|
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- and asset-backed securities, U.S. government and agency securities,
and foreign government bonds. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.
|
|
|
|
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 and intangible assets, when they are 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.
|
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 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.
17
PART I
Item 1
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
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
1,516
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,516
|
|
|
$
|
0
|
|
|
$
|
1,516
|
|
Commercial paper
|
|
|
0
|
|
|
|
745
|
|
|
|
0
|
|
|
|
745
|
|
|
|
0
|
|
|
|
745
|
|
Certificates of deposit
|
|
|
0
|
|
|
|
1,304
|
|
|
|
0
|
|
|
|
1,304
|
|
|
|
0
|
|
|
|
1,304
|
|
U.S. government and agency securities
|
|
|
106,431
|
|
|
|
6,260
|
|
|
|
0
|
|
|
|
112,691
|
|
|
|
0
|
|
|
|
112,691
|
|
Foreign government bonds
|
|
|
10
|
|
|
|
5,723
|
|
|
|
0
|
|
|
|
5,733
|
|
|
|
0
|
|
|
|
5,733
|
|
Mortgage- and asset-backed securities
|
|
|
0
|
|
|
|
4,620
|
|
|
|
0
|
|
|
|
4,620
|
|
|
|
0
|
|
|
|
4,620
|
|
Corporate notes and bonds
|
|
|
0
|
|
|
|
6,502
|
|
|
|
1
|
|
|
|
6,503
|
|
|
|
0
|
|
|
|
6,503
|
|
Municipal securities
|
|
|
0
|
|
|
|
343
|
|
|
|
0
|
|
|
|
343
|
|
|
|
0
|
|
|
|
343
|
|
Common and preferred stock
|
|
|
6,696
|
|
|
|
2,377
|
|
|
|
18
|
|
|
|
9,091
|
|
|
|
0
|
|
|
|
9,091
|
|
Derivatives
|
|
|
6
|
|
|
|
533
|
|
|
|
0
|
|
|
|
539
|
|
|
|
(164
|
)
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
114,659
|
|
|
$
|
28,407
|
|
|
$
|
19
|
|
|
$
|
143,085
|
|
|
$
|
(164
|
)
|
|
$
|
142,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and other
|
|
$
|
3
|
|
|
$
|
184
|
|
|
$
|
0
|
|
|
$
|
187
|
|
|
$
|
(161
|
)
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Gross Fair
Value
|
|
|
|
Netting
|
(a)
|
|
|
Net Fair
Value
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
1,012
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,012
|
|
|
$
|
0
|
|
|
$
|
1,012
|
|
Commercial paper
|
|
|
0
|
|
|
|
298
|
|
|
|
0
|
|
|
|
298
|
|
|
|
0
|
|
|
|
298
|
|
Certificates of deposit
|
|
|
0
|
|
|
|
1,000
|
|
|
|
0
|
|
|
|
1,000
|
|
|
|
0
|
|
|
|
1,000
|
|
U.S. government and agency securities
|
|
|
86,492
|
|
|
|
3,707
|
|
|
|
0
|
|
|
|
90,199
|
|
|
|
0
|
|
|
|
90,199
|
|
Foreign government bonds
|
|
|
10
|
|
|
|
5,705
|
|
|
|
0
|
|
|
|
5,715
|
|
|
|
0
|
|
|
|
5,715
|
|
Mortgage- and asset-backed securities
|
|
|
0
|
|
|
|
4,803
|
|
|
|
0
|
|
|
|
4,803
|
|
|
|
0
|
|
|
|
4,803
|
|
Corporate notes and bonds
|
|
|
0
|
|
|
|
6,361
|
|
|
|
1
|
|
|
|
6,362
|
|
|
|
0
|
|
|
|
6,362
|
|
Municipal securities
|
|
|
0
|
|
|
|
342
|
|
|
|
0
|
|
|
|
342
|
|
|
|
0
|
|
|
|
342
|
|
Common and preferred stock
|
|
|
6,918
|
|
|
|
2,114
|
|
|
|
18
|
|
|
|
9,050
|
|
|
|
0
|
|
|
|
9,050
|
|
Derivatives
|
|
|
6
|
|
|
|
633
|
|
|
|
0
|
|
|
|
639
|
|
|
|
(401
|
)
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
94,438
|
|
|
$
|
24,963
|
|
|
$
|
19
|
|
|
$
|
119,420
|
|
|
$
|
(401
|
)
|
|
$
|
119,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and other
|
|
$
|
17
|
|
|
$
|
613
|
|
|
$
|
0
|
|
|
$
|
630
|
|
|
$
|
(398
|
)
|
|
$
|
232
|
|
|
|
(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.
|
The changes in our Level 3
financial instruments that are measured at fair value on a recurring basis were immaterial during the periods presented.
18
PART I
Item 1
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
June 30,
2016
|
|
|
|
|
Net fair value of assets measured at fair value on a recurring basis
|
|
$
|
142,921
|
|
|
$
|
119,019
|
|
Cash
|
|
|
3,473
|
|
|
|
3,501
|
|
Common and preferred stock measured at fair value on a nonrecurring basis
|
|
|
802
|
|
|
|
767
|
|
Other investments measured at fair value on a nonrecurring basis
|
|
|
587
|
|
|
|
593
|
|
Less derivative net assets classified as other current assets
|
|
|
(393
|
)
|
|
|
(246
|
)
|
Other
|
|
|
2
|
|
|
|
12
|
|
|
|
|
|
|
|
Recorded basis of investment components
|
|
$
|
147,392
|
|
|
$
|
123,646
|
|
|
|
|
|
|
|
|
|
|
Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the three months ended September 30, 2016 and 2015, 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
June 30,
2016
|
|
|
|
|
Raw materials
|
|
$
|
582
|
|
|
$
|
612
|
|
Work in process
|
|
|
110
|
|
|
|
158
|
|
Finished goods
|
|
|
2,430
|
|
|
|
1,481
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,122
|
|
|
$
|
2,251
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 GOODWILL
Changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
June 30,
2016
|
|
|
Acquisitions
|
|
|
Other
|
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
Productivity and Business Processes
|
|
$
|
6,678
|
|
|
$
|
2
|
|
|
$
|
22
|
|
|
$
|
6,702
|
|
Intelligent Cloud
|
|
|
5,467
|
|
|
|
0
|
|
|
|
11
|
|
|
|
5,478
|
|
More Personal Computing
|
|
|
5,727
|
|
|
|
14
|
|
|
|
(14
|
)
|
|
|
5,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total goodwill
|
|
$
|
17,872
|
|
|
$
|
16
|
|
|
$
|
19
|
|
|
$
|
17,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 change in the amounts allocated to goodwill during the periods in which the
adjustments are determined.
Any change in the goodwill amounts resulting from foreign currency translations and purchase accounting
adjustments 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.
19
PART I
Item 1
NOTE 9 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
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
June 30,
2016
|
|
|
|
|
|
|
|
|
|
|
Technology-based
(a)
|
|
$
|
6,016
|
|
|
|
|
|
|
$
|
(3,847
|
)
|
|
$
|
2,169
|
|
|
$
|
5,970
|
|
|
|
|
|
|
$
|
(3,648
|
)
|
|
$
|
2,322
|
|
Marketing-related
|
|
|
1,866
|
|
|
|
|
|
|
|
(653
|
)
|
|
|
1,213
|
|
|
|
1,869
|
|
|
|
|
|
|
|
(616
|
)
|
|
|
1,253
|
|
Contract-based
|
|
|
796
|
|
|
|
|
|
|
|
(722
|
)
|
|
|
74
|
|
|
|
796
|
|
|
|
|
|
|
|
(718
|
)
|
|
|
78
|
|
Customer-related
|
|
|
470
|
|
|
|
|
|
|
|
(404
|
)
|
|
|
66
|
|
|
|
465
|
|
|
|
|
|
|
|
(385
|
)
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,148
|
|
|
|
|
|
|
$
|
(5,626
|
)
|
|
$
|
3,522
|
|
|
$
|
9,100
|
|
|
|
|
|
|
$
|
(5,367
|
)
|
|
$
|
3,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Technology-based intangible assets included $101 million and $115 million of net carrying amount of software to be sold, leased, or otherwise marketed as
of September
30, 2016 and June
30, 2016, respectively.
|
Intangible assets
amortization expense was $214 million and $242 million for the three months ended September 30, 2016 and 2015, respectively. Amortization of capitalized software was $14 million and $18 million for the three months ended September 30, 2016
and 2015, respectively.
The following table outlines the estimated future amortization expense related to intangible assets held as of
September 30, 2016:
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
Year Ending June 30,
|
|
|
|
|
|
|
2017 (excluding the three months ended September 30, 2016)
|
|
$
|
563
|
|
2018
|
|
|
685
|
|
2019
|
|
|
533
|
|
2020
|
|
|
456
|
|
2021
|
|
|
403
|
|
Thereafter
|
|
|
882
|
|
|
|
Total
|
|
$
|
3,522
|
|
|
|
|
|
|
NOTE 10 DEBT
Short-term Debt
As of September 30, 2016, we had $14.5 billion of commercial paper
issued and outstanding, with a weighted-average interest rate of 0.55% and maturities ranging from 47 days to 187 days. As of June 30, 2016, we had $12.9 billion of commercial paper issued and outstanding, with a weighted-average interest rate
of 0.43% and maturities ranging from 1 day to 99 days. The estimated fair value of this commercial paper approximates its carrying value.
We have two $5.0 billion credit facilities that expire on November 1, 2016 and November 14, 2018, respectively. These credit facilities
serve as a back-up for our commercial paper program. As of September 30, 2016, we were in compliance with the only financial covenant in both credit agreements, 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 agreements. No amounts were drawn against these credit facilities during any of the periods presented.
Long-term Debt
As of September 30,
2016, the total carrying value and estimated fair value of our long-term debt were $60.2 billion and $64.0 billion, respectively. As of June 30, 2016, the total carrying value and estimated fair value of our long-term debt were $40.6 billion
and $44.0 billion, respectively. These estimated fair values are based on Level 2 inputs.
20
PART I
Item 1
The components of our long-term debt and the associated interest rates were as follows as of
September 30, 2016 and June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Date
|
|
|
|
|
Face Value
September 30,
2016
|
|
|
Face Value
June 30,
2016
|
|
|
Stated
Interest
Rate
|
|
|
Effective
Interest
Rate
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 15, 2017
|
|
|
|
|
|
|
600
|
|
|
|
600
|
|
|
|
0.875%
|
|
|
|
1.084%
|
|
May 1, 2018
|
|
|
|
|
|
|
450
|
|
|
|
450
|
|
|
|
1.000%
|
|
|
|
1.106%
|
|
November 3, 2018
|
|
|
|
|
|
|
1,750
|
|
|
|
1,750
|
|
|
|
1.300%
|
|
|
|
1.396%
|
|
December 6, 2018
|
|
|
|
|
|
|
1,250
|
|
|
|
1,250
|
|
|
|
1.625%
|
|
|
|
1.824%
|
|
June 1, 2019
|
|
|
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
4.200%
|
|
|
|
4.379%
|
|
August 8, 2019
(a)
|
|
|
|
|
|
|
2,500
|
|
|
|
*
|
|
|
|
1.100%
|
|
|
|
1.203%
|
|
February 12, 2020
|
|
|
|
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
1.850%
|
|
|
|
1.935%
|
|
October 1, 2020
|
|
|
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
3.000%
|
|
|
|
3.137%
|
|
November 3, 2020
|
|
|
|
|
|
|
2,250
|
|
|
|
2,250
|
|
|
|
2.000%
|
|
|
|
2.093%
|
|
February 8, 2021
|
|
|
|
|
|
|
500
|
|
|
|
500
|
|
|
|
4.000%
|
|
|
|
4.082%
|
|
August 8, 2021
(a)
|
|
|
|
|
|
|
2,750
|
|
|
|
*
|
|
|
|
1.550%
|
|
|
|
1.642%
|
|
December 6, 2021
(b)
|
|
|
|
|
|
|
1,967
|
|
|
|
1,944
|
|
|
|
2.125%
|
|
|
|
2.233%
|
|
February 12, 2022
|
|
|
|
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
2.375%
|
|
|
|
2.466%
|
|
November 3, 2022
|
|
|
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
2.650%
|
|
|
|
2.717%
|
|
November 15, 2022
|
|
|
|
|
|
|
750
|
|
|
|
750
|
|
|
|
2.125%
|
|
|
|
2.239%
|
|
May 1, 2023
|
|
|
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
2.375%
|
|
|
|
2.465%
|
|
August 8, 2023
(a)
|
|
|
|
|
|
|
1,500
|
|
|
|
*
|
|
|
|
2.000%
|
|
|
|
2.101%
|
|
December 15, 2023
|
|
|
|
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
3.625%
|
|
|
|
3.726%
|
|
February 12, 2025
|
|
|
|
|
|
|
2,250
|
|
|
|
2,250
|
|
|
|
2.700%
|
|
|
|
2.772%
|
|
November 3, 2025
|
|
|
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3.125%
|
|
|
|
3.176%
|
|
August 8, 2026
(a)
|
|
|
|
|
|
|
4,000
|
|
|
|
*
|
|
|
|
2.400%
|
|
|
|
2.464%
|
|
December 6, 2028
(b)
|
|
|
|
|
|
|
1,967
|
|
|
|
1,944
|
|
|
|
3.125%
|
|
|
|
3.218%
|
|
May 2, 2033
(b)
|
|
|
|
|
|
|
617
|
|
|
|
611
|
|
|
|
2.625%
|
|
|
|
2.690%
|
|
February 12, 2035
|
|
|
|
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
3.500%
|
|
|
|
3.604%
|
|
November 3, 2035
|
|
|
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
4.200%
|
|
|
|
4.260%
|
|
August 8, 2036
(a)
|
|
|
|
|
|
|
2,250
|
|
|
|
*
|
|
|
|
3.450%
|
|
|
|
3.510%
|
|
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
|
|
|
|
|
|
|
500
|
|
|
|
500
|
|
|
|
4.875%
|
|
|
|
4.918%
|
|
February 12, 2045
|
|
|
|
|
|
|
1,750
|
|
|
|
1,750
|
|
|
|
3.750%
|
|
|
|
3.800%
|
|
November 3, 2045
|
|
|
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
4.450%
|
|
|
|
4.492%
|
|
August 8, 2046
(a)
|
|
|
|
|
|
|
4,500
|
|
|
|
*
|
|
|
|
3.700%
|
|
|
|
3.743%
|
|
February 12, 2055
|
|
|
|
|
|
|
2,250
|
|
|
|
2,250
|
|
|
|
4.000%
|
|
|
|
4.063%
|
|
November 3, 2055
|
|
|
|
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
4.750%
|
|
|
|
4.782%
|
|
August 8, 2056
(a)
|
|
|
|
|
|
|
2,250
|
|
|
|
*
|
|
|
|
3.950%
|
|
|
|
4.033%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
60,751
|
|
|
$
|
40,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
In August 2016, we issued $19.8 billion of debt securities.
|
(b)
|
Euro-denominated debt securities.
|
The
notes in the table above 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. Effective July 1, 2016, we retrospectively adopted accounting guidance that requires debt issuance costs to be recorded as a deduction from the carrying amount of the debt liability, consistent with debt discounts. As of September 30,
2016 and June 30, 2016, the combined aggregate unamortized discount and debt issuance costs associated with our long-term debt were $597 million and $392 million, respectively.
21
PART I
Item 1
NOTE 11 INCOME TAXES
Our effective tax rate for the three months ended September 30, 2016 and 2015 was 12% and 11%, respectively. Our effective tax rate was
lower than the U.S. federal statutory rate primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland,
Singapore, and Puerto Rico.
The increase in our current quarter effective tax rate compared to prior year was primarily due to changes
in the mix of our income before income taxes between the U.S. and foreign countries, offset by an increase in the tax benefits relating to stock-based compensation.
Tax contingencies and other income tax liabilities were $12.3 billion and $11.8 billion as of September 30, 2016 and June 30, 2016, respectively, and are included in other long-term liabilities. This
increase relates primarily to current period intercompany transfer pricing.
While we settled a portion of the Internal Revenue Service
(IRS) audit for tax years 2004 to 2006 during the third quarter of fiscal year 2011, and settled a portion of the IRS audit for tax years 2007 to 2009 during the first quarter of fiscal year 2016, we remain under audit for those years.
In February 2012, the IRS withdrew its 2011 Revenue Agents Report for tax years 2004 to 2006 and reopened the audit phase of the examination. As of September 30, 2016, 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 IRS for tax years 2010 to 2016.
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 2016, 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 12 RESTRUCTURING CHARGES
Phone Hardware Restructuring
In June 2015, management approved a plan to restructure our
phone business to better focus and align resources (the Phone Hardware Restructuring Plan), under which we eliminated approximately 7,400 positions in fiscal year 2016.
In fiscal year 2015, we incurred restructuring charges of $780 million under the Phone Hardware Restructuring Plan, including severance expenses
and other reorganization costs. In fiscal year 2016, we reversed $21 million of previously estimated restructuring charges related to contract termination costs. The actions associated with the Phone Hardware Restructuring Plan were substantially
complete as of June 30, 2016, and are expected to be completed by the end of calendar year 2016.
2016 Restructuring
We periodically evaluate how to best deploy the companys resources. In the fourth quarter of 2016, management approved restructuring plans
that would result in job eliminations, primarily across our smartphone hardware business and global sales. In addition to the elimination of 1,850 positions that were announced in May 2016, approximately 2,850 roles globally will be reduced during
fiscal year 2017 as an extension of the earlier plan. These actions are expected to be completed by the end of the current fiscal year.
In fiscal year 2016, we incurred restructuring charges of $501 million in connection with the 2016 restructuring plans, including severance
expenses and other reorganization costs. We do not expect to incur additional charges for these restructuring plans in subsequent years.
22
PART I
Item 1
Restructuring charges associated with each of these plans were included in impairment,
integration, and restructuring expenses on our consolidated income statement, and were reflected in Corporate and Other in our table of operating income (loss) by segment.
Changes in the restructuring liability were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
Severance
|
|
|
|
Other
|
(a)
|
|
|
Total
|
|
|
|
|
|
|
|
Restructuring liability as of June 30, 2016
|
|
$
|
470
|
|
|
$
|
239
|
|
|
$
|
709
|
|
Restructuring charges
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Cash paid
|
|
|
(161
|
)
|
|
|
(15
|
)
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
Restructuring liability as of September 30, 2016
|
|
$
|
309
|
|
|
$
|
224
|
|
|
$
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Other primarily reflects activities associated with the consolidation of our facilities and manufacturing operations, including contract
termination costs and asset write-downs.
|
NOTE 13 UNEARNED REVENUE
Unearned revenue by segment was as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
June 30,
2016
|
|
|
|
|
Productivity and Business Processes
|
|
$
|
11,486
|
|
|
$
|
12,497
|
|
Intelligent Cloud
|
|
|
10,322
|
|
|
|
11,472
|
|
More Personal Computing
|
|
|
3,298
|
|
|
|
3,334
|
|
Corporate and Other
|
|
|
8,482
|
|
|
|
6,606
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,588
|
|
|
$
|
33,909
|
|
|
|
|
|
|
|
|
|
|
Revenue from Windows 10 is primarily recognized at the time of billing in the More Personal Computing segment, and
the deferral and subsequent recognition of revenue is reflected in Corporate and Other in the table above. As of September 30, 2016 and June 30, 2016, we deferred a net $8.5 billion and $6.6 billion, respectively, in revenue related to Windows
10.
NOTE 14 COMMITMENTS AND CONTINGENCIES
Capital Lease Commitments
We have capital leases for datacenters and corporate offices. As of
September 30, 2016 and June 30, 2016, assets recorded under capital leases were $1.1 billion and $865 million, respectively, and accumulated depreciation associated with capital leases was $72 million and $57 million, respectively. For the three
months ended September 30, 2016, property and equipment acquired under capital leases was $267 million. We did not acquire any property and equipment under capital leases for the three months ended September 30, 2015. As of September 30, 2016 and
June 30, 2016, capital lease obligations included in other current liabilities were $32 million and $25 million, respectively, and capital lease obligations included in other long-term liabilities were $1.0 billion and $761 million, respectively.
23
PART I
Item 1
Future minimum lease payments under non-cancellable capital leases as of September 30, 2016 are as
follows:
|
|
|
|
|
(In millions)
|
|
|
|
|
|
Year Ending June 30,
|
|
|
|
|
|
2017 (excluding the three months ended September 30, 2016)
|
|
$
|
61
|
|
2018
|
|
|
83
|
|
2019
|
|
|
85
|
|
2020
|
|
|
87
|
|
2021
|
|
|
89
|
|
Thereafter
|
|
|
1,052
|
|
|
|
Total
(a)
|
|
$
|
1,457
|
|
|
|
|
|
|
(a)
|
As of September 30, 2016, capital leases included imputed interest of $410 million.
|
As of September 30, 2016, we had additional purchase obligations for capital leases executed but not yet recorded of $5.0 billion.
Other Commitments
On June 11, 2016,
we entered into a definitive agreement to acquire LinkedIn Corporation (LinkedIn) for $196 per share in an all-cash transaction valued at $26.2 billion, inclusive of LinkedIns net cash (the Merger Agreement). We will
finance the transaction primarily through the issuance of new indebtedness. The Merger Agreement has been unanimously approved by the Boards of Directors of Microsoft and LinkedIn, and has been approved by LinkedIns shareholders. We expect the
acquisition will close in calendar year 2016, subject to satisfaction of certain regulatory approvals and other customary closing conditions. The acquisition is expected to accelerate the growth of LinkedIn, as well as Office 365 and Dynamics.
Patent and Intellectual Property Claims
IPCom patent litigation
IPCom
GmbH & Co. (IPCom) 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 Corporation (Nokia) and many of the leading cell phone companies and operators. In November 2014, Microsoft and IPCom entered into a standstill agreement staying all of the pending litigation against
Microsoft to permit the parties to pursue settlement discussions.
InterDigital patent litigation
InterDigital Technology Corporation and InterDigital Communications Corporation (collectively, IDT) filed four patent infringement
cases against Nokia in the International Trade Commission (ITC) and in U.S. District Court for the District of Delaware between 2007 and 2013. We have been added to these cases as a defendant. IDT has cases pending against other
defendants based on the same patents because most of the patents at issue allegedly relate to 3G and 4G wireless communications standards essential functionality. The cases involving us include three ITC investigations where IDT sought 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. Each of the ITC matters has been resolved in our favor. In September 2015, in an
inter partes
review the United States Patent Trial and Appeal Board issued a final written decision that deemed unpatentable all asserted claims of the patent remaining at issue in the Delaware case. IDT appealed this decision to the U.S. Court of Appeals for
the Federal Circuit. The Delaware case has been stayed pending final completion of the
inter partes
review (including appeals and any subsequent proceedings in the Patent Office). We filed an antitrust complaint against IDT in the District of
Delaware in August 2015 asserting violations of Section 2 of the Sherman Act, alleging unlawful exploitation of standard essential patents. That case is set for trial in September 2018.
24
PART I
Item 1
European copyright levies
We assumed from Nokia all potential liability due to Nokias alleged failure to pay private copyright 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 European Union (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 it 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 were pending in Germany and Austria, due to both the high volume
of sales and high levy amounts sought in these countries. We reached a settlement of the Austrian case in August 2016. In Germany, the only period for which settlement has not been reached is 2004-2007. In July, the German Supreme Court heard our
appeal contesting the legality of the levy assessed on phones with music players and over five megabytes of memory. The Supreme Court vacated the lower courts ruling, and we are awaiting the Supreme Courts full opinion. We expect that
the case will be remanded for further proceedings to set an appropriate levy for the 2004-2007 period.
Other patent and intellectual property claims
In addition to these cases, there were 58 other patent infringement cases pending against Microsoft as of September 30, 2016.
Antitrust, Unfair Competition, and Overcharge Class Actions
Antitrust and unfair competition class action lawsuits were filed against us in British Columbia, Ontario, and Quebec, Canada. All three have been certified on behalf of Canadian indirect purchasers who acquired
licenses for Microsoft operating system software and/or productivity application software between 1998 and 2010.
The trial of the
British Columbia action commenced in May 2016. The plaintiffs filed their case in chief in August 2016, setting out claims made, authorities, and evidence in support of their claims. A six-month oral hearing is scheduled to commence in
September 2017, consisting of cross examination on witness affidavits. The Ontario and Quebec cases are inactive.
Other Antitrust Litigation and
Claims
China State Administration for Industry and Commerce investigatio
n
In 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,
file verification issues related to Windows and Office software, and potentially other issues.
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 assumed responsibility for these claims as part of our acquisition of Nokias Devices and Services business and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are
consolidated for certain pre-trial proceedings; the remaining 10 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 2013, defendants in the consolidated cases moved to exclude plaintiffs expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the court granted in part
defendants motion to exclude
25
PART I
Item 1
plaintiffs general causation experts. The plaintiffs filed an interlocutory appeal challenging the standard for evaluating expert scientific evidence, which the District of Columbia Court
of Appeals agreed to hear
en banc
. Trial court proceedings are stayed pending resolution of the appeal.
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 1,600 hours, including a subclass of users with brain tumors. Microsoft was served with the complaint in June 2014 and has been
substituted for the Nokia defendants. The litigation is not yet active as several defendants remain to be served.
Other Contingencies
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 September 30, 2016, we accrued aggregate legal liabilities
of $443 million in other current liabilities. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $1.6 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.
NOTE 15 STOCKHOLDERS EQUITY
Share Repurchases
On September 16, 2013, our Board of Directors approved a 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. As of
September 30, 2016, $3.5 billion remained of our $40.0 billion share repurchase program. All repurchases were made using cash resources.
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing an additional $40.0 billion in share repurchases. This share repurchase program will commence following completion of
the program approved on September 16, 2013, has no expiration, and may be suspended or discontinued at any time without notice.
We
repurchased the following shares of common stock through our share repurchase program approved on September 16, 2013:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
Shares of common stock repurchased
|
|
|
63
|
|
|
|
89
|
|
Value of common stock repurchased
|
|
$
|
3,550
|
|
|
$
|
4,000
|
|
|
|
The above table excludes shares repurchased to settle statutory employee tax withholding related to the vesting of
stock awards.
26
PART I
Item 1
Dividends
Our Board of Directors declared the following dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Dividend
Per Share
|
|
|
Record Date
|
|
|
Total Amount
|
|
|
Payment Date
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
September 20, 2016
|
|
$
|
0.39
|
|
|
|
November 17, 2016
|
|
|
$
|
3,036
|
|
|
|
December 8, 2016
|
|
September 15, 2015
|
|
$
|
0.36
|
|
|
|
November 19, 2015
|
|
|
$
|
2,868
|
|
|
|
December 10, 2015
|
|
|
|
The dividend declared on September 20, 2016 was included in other current liabilities as of September 30,
2016.
NOTE 16 ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in accumulated other comprehensive income by component:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income balance, beginning of period
|
|
$
|
352
|
|
|
$
|
590
|
|
Unrealized gains, net of tax effects of
$1
and $28
|
|
|
35
|
|
|
|
161
|
|
|
|
|
Reclassification adjustments for gains included in revenue
|
|
|
(75
|
)
|
|
|
(109
|
)
|
Tax expense included in provision for income taxes
|
|
|
3
|
|
|
|
5
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(72
|
)
|
|
|
(104
|
)
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
(37
|
)
|
|
|
57
|
|
|
|
|
|
|
|
Accumulated other comprehensive income balance, end of period
|
|
$
|
315
|
|
|
$
|
647
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income balance, beginning of period
|
|
$
|
2,941
|
|
|
$
|
3,169
|
|
Unrealized gains (losses), net of tax effects of
$182
and $(305)
|
|
|
339
|
|
|
|
(566
|
)
|
|
|
|
Reclassification adjustments for gains included in other income (expense), net
|
|
|
(394
|
)
|
|
|
(8
|
)
|
Tax expense included in provision for income taxes
|
|
|
138
|
|
|
|
3
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(256
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
83
|
|
|
|
(571
|
)
|
|
|
|
|
|
|
Accumulated other comprehensive income balance, end of period
|
|
$
|
3,024
|
|
|
$
|
2,598
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments and other
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss balance, beginning of period
|
|
$
|
(1,756
|
)
|
|
$
|
(1,237
|
)
|
Translation adjustments and other, net of tax effects of
$7
and $(12)
|
|
|
98
|
|
|
|
(270
|
)
|
|
|
|
|
|
|
Accumulated other comprehensive loss balance, end of period
|
|
$
|
(1,658
|
)
|
|
$
|
(1,507
|
)
|
|
|
|
|
|
|
Accumulated other comprehensive income, end of period
|
|
$
|
1,681
|
|
|
$
|
1,738
|
|
|
|
|
|
|
|
|
|
|
NOTE 17 SEGMENT
INFORMATION
In its operation of the business, management, including our chief operating decision maker, who is also our Chief
Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with U.S. GAAP. During the periods presented, we reported our financial performance based on the
following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
27
PART I
Item 1
Our reportable segments are described below.
Productivity and Business Processes
Our
Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:
|
|
|
Office Commercial, including volume licensing and subscriptions to Office 365 commercial for products and services such as Office, Exchange, SharePoint, and
Skype for Business, and related Client Access Licenses (CALs).
|
|
|
|
Office Consumer, including Office sold through retail or through an Office 365 consumer subscription, and Office Consumer Services, including Skype,
Outlook.com, and OneDrive.
|
|
|
|
Dynamics business solutions, including Dynamics ERP products, Dynamics CRM on-premises, and Dynamics CRM Online.
|
Intelligent Cloud
Our Intelligent Cloud
segment consists of our public, private, and hybrid server products and cloud services that can power modern business. This segment primarily comprises:
|
|
|
Server products and cloud services, including Microsoft SQL Server, Windows Server, Visual Studio, System Center, and related CALs, as well as Azure.
|
|
|
|
Enterprise Services, including Premier Support Services and Microsoft Consulting Services.
|
More Personal Computing
Our More Personal
Computing segment consists of products and services geared towards harmonizing the interests of end users, developers, and IT professionals across screens of all sizes. This segment primarily comprises:
|
|
|
Windows, including Windows original equipment manufacturer licensing and other non-volume licensing of the Windows operating system; Windows Commercial,
comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; Windows Embedded; MSN display advertising; and Windows Phone licensing.
|
|
|
|
Devices, including Microsoft Surface, phones, and PC accessories.
|
|
|
|
Gaming, including Xbox hardware and Xbox software and services, comprising Xbox Live transactions, subscriptions, and advertising (Xbox Live),
video games, and third-party video game royalties.
|
Corporate and Other includes adjustments to conform our internal accounting policies to U.S. GAAP, and impairment, integration, and restructuring
expenses. Significant internal accounting policies that differ from U.S. GAAP relate to Windows 10 revenue recognition.
Revenue and
costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue on certain contracts is allocated
among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is allocated
in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit, and are generally allocated based on
relative gross margin.
In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are
allocated to them. These allocated costs include costs of: legal, including settlements, and fines; information technology; human resources; finance; excise taxes; field selling; shared facilities services; and customer service and support. Each
allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain corporate-level activity is not allocated to our segments, including impairment, integration, and restructuring expenses.
28
PART I
Item 1
Segment revenue and operating income (loss) were as follows during the periods presented:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Productivity and Business Processes
|
|
$
|
6,658
|
|
|
$
|
6,306
|
|
Intelligent Cloud
|
|
|
6,382
|
|
|
|
5,892
|
|
More Personal Computing
|
|
|
9,294
|
|
|
|
9,462
|
|
Corporate and Other
(a)
|
|
|
(1,881
|
)
|
|
|
(1,281
|
)
|
|
|
|
|
|
|
Total revenue
|
|
$
|
20,453
|
|
|
$
|
20,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
|
2015
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
Productivity and Business Processes
|
|
$
|
3,120
|
|
|
$
|
3,156
|
|
Intelligent Cloud
|
|
|
2,058
|
|
|
|
2,391
|
|
More Personal Computing
|
|
|
1,928
|
|
|
|
1,527
|
|
Corporate and Other
(a)
|
|
|
(1,881
|
)
|
|
|
(1,281
|
)
|
|
|
|
|
|
|
Total operating income
|
|
$
|
5,225
|
|
|
$
|
5,793
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Corporate and Other revenue and operating loss for the three months ended September
30, 2016 and 2015 consisted of net revenue deferrals
related to sales of Windows 10.
|
Assets are not allocated to segments for internal reporting presentations. A
portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment, and 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.
29
PART I
Item 1