NOTES TO FINANCI
AL 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 investee’s 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 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 management’s 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 365 (“Dynamics 365”), and Xbox Live; solution support; and consulting services. Service and other revenue also includes sales from online advertising and LinkedIn.
Recent Accounting Guidance Not Yet Adopted
Accounting for Income Taxes – Intra-Entity Asset Transfers
In October 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. This guidance is effective for us beginning July 1, 2018, with early adoption permitted beginning July 1, 2017. We plan to adopt the guidance effective July 1, 2018. Adoption of the guidance will be applied using a modified retrospective approach through a cumulative-effect
8
PART I
Item 1
adjustment to retained earnings as of
the effective date. A cumulative-effect adjustment will capture the write-off of income tax consequences deferred from past intra-entity transfers involving
assets other than inventory and new deferred tax assets for amounts not recognized under current U
.S. GAAP. We are currently evaluating the impact of the guidance on our consolidated financial statements, including accounting policies, processes, and systems.
Financial Instruments – Credit Losses
In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under 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. We will be required to use a forward-looking expected credit loss model for accounts receivables, loans, and other financial instruments. 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 standard will be effective for us beginning July 1, 2020, with early adoption permitted beginning July 1, 2019. Adoption of the standard will be applied using a modified retrospective approach 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, including accounting policies, processes, and systems.
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 right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the 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 existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.
The standard will be effective for us beginning July 1, 2019, with early adoption permitted. We plan to adopt the standard effective July 1, 2017 concurrent with our adoption of the new standard related to revenue recognition. We intend to elect the available practical expedients on adoption. While our ability to early adopt depends on system readiness, including software procured from third-party providers, and completing our analysis of information necessary to restate prior period consolidated financial statements, we remain on schedule and have implemented key system functionality to enable the preparation of restated financial information.
We anticipate this standard will have a material impact on our consolidated balance sheets. However, we do not expect adoption will have a material impact on our consolidated income statements. While we are continuing to assess potential impacts of the standard, we currently expect the most significant impact will be the recognition of ROU assets and lease liabilities for operating leases. We expect our accounting for capital leases to remain substantially unchanged.
We are nearing completion of retrospectively adjusting financial information for fiscal year 2016 and are progressing as planned for fiscal year 2017. We expect adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for operating leases of approximately $5 billion as of June 30, 2016. ROU assets and lease liabilities for operating leases are expected to increase in fiscal year 2017 primarily due to the acquisition of LinkedIn Corporation (“LinkedIn”) and additional datacenter leases.
Financial Instruments – Recognition, Measurement, Presentation, and Disclosure
In January 2016, the FASB issued a new standard related to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the changes in the standard 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 standard will be effective for us beginning July 1, 2018. Adoption of the standard will be applied using a modified retrospective approach 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, including accounting policies, processes, and systems.
9
PART I
Item 1
Revenue from Contracts with Customers
In May 2014, the FASB issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration 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 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 (modified retrospective method). We plan to adopt the standard using the full retrospective method to restate each prior reporting period presented.
The standard will be effective for us beginning July 1, 2018, with early adoption permitted as of the original effective date of July 1, 2017. We plan to adopt the standard effective July 1, 2017. While our ability to early adopt using the full retrospective method depends on system readiness, including software procured from third-party providers, and completing our analysis of information necessary to restate prior period consolidated financial statements, we remain on schedule and have implemented key system functionality to enable the preparation of restated financial information.
We have reached conclusions on key accounting assessments related to the standard. However, we are finalizing our assessment and quantifying the impacts related to accounting for costs incurred to obtain a contract based on guidance issued by the FASB Transition Resource Group as part of their November 2016 meeting. We will continue to monitor and assess the impact of any changes to the standard and interpretations as they become available.
The most significant impact of the standard relates to our accounting for software license revenue. Specifically, under the 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 expect to recognize license revenue at the time of contract execution 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 depend on contract-specific terms and in some instances may vary from recognition at the time of billing. We expect revenue recognition related to our hardware, cloud offerings including Office 365, LinkedIn, and professional services to remain substantially unchanged.
We are nearing completion of retrospectively adjusting financial information for fiscal year 2016 and are progressing as planned for fiscal year 2017. We estimate our revenue would have been approximately $6 billion higher in fiscal year 2016 under the standard primarily due to the net change in Windows 10 revenue recognition.
10
PART I
Item 1
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 were as follows:
(In millions, except earnings per share)
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available for common shareholders (A)
|
|
$
|
4,801
|
|
|
$
|
3,756
|
|
|
$
|
14,691
|
|
|
$
|
13,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares of common stock (B)
|
|
|
7,725
|
|
|
|
7,895
|
|
|
|
7,756
|
|
|
|
7,952
|
|
Dilutive effect of stock-based awards
|
|
|
88
|
|
|
|
90
|
|
|
|
84
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and common stock equivalents (C)
|
|
|
7,813
|
|
|
|
7,985
|
|
|
|
7,840
|
|
|
|
8,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (A/B)
|
|
$
|
0.62
|
|
|
$
|
0.48
|
|
|
$
|
1.89
|
|
|
$
|
1.72
|
|
Diluted (A/C)
|
|
$
|
0.61
|
|
|
$
|
0.47
|
|
|
$
|
1.87
|
|
|
$
|
1.70
|
|
|
|
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
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Dividends and interest income
|
|
$
|
380
|
|
|
$
|
230
|
|
|
$
|
984
|
|
|
$
|
629
|
|
Interest expense
|
|
|
(609
|
)
|
|
|
(340
|
)
|
|
|
(1,567
|
)
|
|
|
(898
|
)
|
Net recognized gains on investments
|
|
|
790
|
|
|
|
85
|
|
|
|
1,893
|
|
|
|
193
|
|
Net losses on derivatives
|
|
|
(200
|
)
|
|
|
(155
|
)
|
|
|
(340
|
)
|
|
|
(414
|
)
|
Net losses on foreign currency remeasurements
|
|
|
0
|
|
|
|
(18
|
)
|
|
|
(134
|
)
|
|
|
(52
|
)
|
Other, net
|
|
|
(39
|
)
|
|
|
(49
|
)
|
|
|
(228
|
)
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
322
|
|
|
$
|
(247
|
)
|
|
$
|
608
|
|
|
$
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following are details of net recognized gains (losses) on investments:
(In millions)
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Other-than-temporary impairments of investments
|
|
$
|
(15
|
)
|
|
$
|
(86
|
)
|
|
$
|
(54
|
)
|
|
$
|
(248
|
)
|
Realized gains from sales of available-for-sale securities
|
|
|
938
|
|
|
|
282
|
|
|
|
2,272
|
|
|
|
740
|
|
Realized losses from sales of available-for-sale securities
|
|
|
(133
|
)
|
|
|
(111
|
)
|
|
|
(325
|
)
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
790
|
|
|
$
|
85
|
|
|
$
|
1,893
|
|
|
$
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
PART I
Item 1
NOTE 4
—
INVESTMENTS
Investment Components
The components of investments, including associated derivatives, were as follows:
(In millions)
|
|
Cost Basis
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Recorded
Basis
|
|
|
Cash
and Cash
Equivalents
|
|
|
Short-term
Investments
|
|
|
Equity
and Other
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,390
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,390
|
|
|
$
|
3,390
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Mutual funds
|
|
|
1,139
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,139
|
|
|
|
1,139
|
|
|
|
0
|
|
|
|
0
|
|
Commercial paper
|
|
|
536
|
|
|
|
0
|
|
|
|
0
|
|
|
|
536
|
|
|
|
337
|
|
|
|
199
|
|
|
|
0
|
|
Certificates of deposit
|
|
|
1,767
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,767
|
|
|
|
1,341
|
|
|
|
426
|
|
|
|
0
|
|
U.S. government and agency securities
|
|
|
104,688
|
|
|
|
75
|
|
|
|
(345
|
)
|
|
|
104,418
|
|
|
|
102
|
|
|
|
104,316
|
|
|
|
0
|
|
Foreign government bonds
|
|
|
5,344
|
|
|
|
2
|
|
|
|
(16
|
)
|
|
|
5,330
|
|
|
|
404
|
|
|
|
4,926
|
|
|
|
0
|
|
Mortgage- and asset-backed securities
|
|
|
4,241
|
|
|
|
16
|
|
|
|
(4
|
)
|
|
|
4,253
|
|
|
|
0
|
|
|
|
4,253
|
|
|
|
0
|
|
Corporate notes and bonds
|
|
|
4,823
|
|
|
|
60
|
|
|
|
(17
|
)
|
|
|
4,866
|
|
|
|
0
|
|
|
|
4,866
|
|
|
|
0
|
|
Municipal securities
|
|
|
284
|
|
|
|
38
|
|
|
|
0
|
|
|
|
322
|
|
|
|
0
|
|
|
|
322
|
|
|
|
0
|
|
Common and preferred stock
|
|
|
3,380
|
|
|
|
3,561
|
|
|
|
(79
|
)
|
|
|
6,862
|
|
|
|
0
|
|
|
|
0
|
|
|
|
6,862
|
|
Other investments
|
|
|
516
|
|
|
|
0
|
|
|
|
0
|
|
|
|
516
|
|
|
|
0
|
|
|
|
(3
|
)
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
130,108
|
|
|
$
|
3,752
|
|
|
$
|
(461
|
)
|
|
$
|
133,399
|
|
|
$
|
6,713
|
|
|
$
|
119,305
|
|
|
$
|
7,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
|
|
615
|
|
|
|
0
|
|
|
|
0
|
|
|
|
615
|
|
|
|
0
|
|
|
|
(3
|
)
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
119,078
|
|
|
$
|
4,895
|
|
|
$
|
(302
|
)
|
|
$
|
123,671
|
|
|
$
|
6,510
|
|
|
$
|
106,730
|
|
|
$
|
10,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017 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 $856 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 March 31, 2017, collateral received was $4.6 billion, which was primarily comprised of U.S. government and agency securities. As of June 30, 2016, collateral received was $294 million, which was primarily comprised of cash.
12
PART I
Item 1
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
68,195
|
|
|
$
|
(336
|
)
|
|
$
|
373
|
|
|
$
|
(9
|
)
|
|
$
|
68,568
|
|
|
$
|
(345
|
)
|
Foreign government bonds
|
|
|
5,281
|
|
|
|
(4
|
)
|
|
|
23
|
|
|
|
(12
|
)
|
|
|
5,304
|
|
|
|
(16
|
)
|
Mortgage- and asset-backed securities
|
|
|
774
|
|
|
|
(3
|
)
|
|
|
198
|
|
|
|
(1
|
)
|
|
|
972
|
|
|
|
(4
|
)
|
Corporate notes and bonds
|
|
|
658
|
|
|
|
(11
|
)
|
|
|
346
|
|
|
|
(6
|
)
|
|
|
1,004
|
|
|
|
(17
|
)
|
Common and preferred stock
|
|
|
295
|
|
|
|
(25
|
)
|
|
|
233
|
|
|
|
(54
|
)
|
|
|
528
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
75,203
|
|
|
$
|
(379
|
)
|
|
$
|
1,173
|
|
|
$
|
(82
|
)
|
|
$
|
76,376
|
|
|
$
|
(461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Debt Investment Maturities
(In millions)
|
|
Cost Basis
|
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
16,644
|
|
|
$
|
16,637
|
|
Due after one year through five years
|
|
|
97,412
|
|
|
|
97,250
|
|
Due after five years through 10 years
|
|
|
6,536
|
|
|
|
6,512
|
|
Due after 10 years
|
|
|
1,091
|
|
|
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
121,683
|
|
|
$
|
121,492
|
|
|
|
|
|
|
|
|
|
|
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.
13
PART I
Item 1
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 March 31, 2017 and June 30, 2016, the total notional amounts of these foreign exchange contracts sold were $10.6 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 March 31, 2017 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 March 31, 2017, the total notional amounts of these foreign exchange contracts purchased and sold were $7.9 billion and $6.3 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 March 31, 2017, the total notional amounts of equity contracts purchased and sold for managing market price risk were $1.3 billion and $1.8 billion, respectively, of which $1.1 billion and $1.2 billion, 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 March 31, 2017, the total notional amounts of fixed-interest rate contracts purchased and sold were $438 million and $393 million, 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 March 31, 2017 and June 30, 2016, the total notional derivative amounts of mortgage contracts purchased were $568 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 March 31, 2017, the total notional amounts of credit contracts purchased and sold were $312 million and $107 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
14
PART I
Item 1
alternatives to the purchase an
d storage of a variety of commodities, including, but not limited to, precious metals, energy, and grain. As of March 31, 2017, the total notional amounts of commodity contracts purchased and sold were $
306
million and $
170
million, respectively. As of Jun
e 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 March 31, 2017, 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.
15
PART I
Item 1
The following table presents the fair values of derivative instruments designated as hedging instruments (“designated hedge derivatives”) and not desi
gnated 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 cre
dit risk and counterparty credit risk:
|
|
March 31, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Short-term
Investments
|
|
|
Other
Current
Assets
|
|
|
Equity and
Other
Investments
|
|
|
Other
Long-term Assets
|
|
|
Other
Current
Liabilities
|
|
|
Other
Long-term Liabilities
|
|
|
Short-term
Investments
|
|
|
Other
Current
Assets
|
|
|
Equity and
Other
Investments
|
|
|
Other
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-designated Hedge Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
13
|
|
|
$
|
75
|
|
|
$
|
0
|
|
|
$
|
6
|
|
|
$
|
(117
|
)
|
|
$
|
(13
|
)
|
|
$
|
33
|
|
|
$
|
156
|
|
|
$
|
0
|
|
|
$
|
(296
|
)
|
Equity contracts
|
|
|
6
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(13
|
)
|
|
|
0
|
|
|
|
23
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(16
|
)
|
Interest rate contracts
|
|
|
9
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(4
|
)
|
|
|
0
|
|
|
|
10
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(25
|
)
|
Credit contracts
|
|
|
5
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(2
|
)
|
|
|
0
|
|
|
|
6
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(5
|
)
|
Commodity contracts
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(1
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33
|
|
|
$
|
75
|
|
|
$
|
0
|
|
|
$
|
6
|
|
|
$
|
(137
|
)
|
|
$
|
(13
|
)
|
|
$
|
72
|
|
|
$
|
156
|
|
|
$
|
0
|
|
|
$
|
(342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated Hedge Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
9
|
|
|
$
|
347
|
|
|
$
|
0
|
|
|
$
|
81
|
|
|
$
|
(126
|
)
|
|
$
|
0
|
|
|
$
|
1
|
|
|
$
|
392
|
|
|
$
|
0
|
|
|
$
|
(263
|
)
|
Equity contracts
|
|
|
0
|
|
|
|
0
|
|
|
|
82
|
|
|
|
0
|
|
|
|
(57
|
)
|
|
|
(55
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
18
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9
|
|
|
$
|
347
|
|
|
$
|
82
|
|
|
$
|
81
|
|
|
$
|
(183
|
)
|
|
$
|
(55
|
)
|
|
$
|
1
|
|
|
$
|
392
|
|
|
$
|
18
|
|
|
$
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross amounts of derivatives
|
|
$
|
42
|
|
|
$
|
422
|
|
|
$
|
82
|
|
|
$
|
87
|
|
|
$
|
(320
|
)
|
|
$
|
(68
|
)
|
|
$
|
73
|
|
|
$
|
548
|
|
|
$
|
18
|
|
|
$
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross derivatives either offset or subject to an enforceable master netting agreement
|
|
$
|
40
|
|
|
$
|
422
|
|
|
$
|
82
|
|
|
$
|
87
|
|
|
$
|
(320
|
)
|
|
$
|
(68
|
)
|
|
$
|
69
|
|
|
$
|
548
|
|
|
$
|
18
|
|
|
$
|
(630
|
)
|
Gross amounts of derivatives offset on the balance sheet
|
|
|
(60
|
)
|
|
|
(106
|
)
|
|
|
(86
|
)
|
|
|
(18
|
)
|
|
|
208
|
|
|
|
59
|
|
|
|
(74
|
)
|
|
|
(302
|
)
|
|
|
(25
|
)
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts presented on the balance sheet
|
|
|
(20
|
)
|
|
|
316
|
|
|
|
(4
|
)
|
|
|
69
|
|
|
|
(112
|
)
|
|
|
(9
|
)
|
|
|
(5
|
)
|
|
|
246
|
|
|
|
(7
|
)
|
|
|
(232
|
)
|
Gross amounts of derivatives not offset on the balance sheet
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Cash collateral received
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(260
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount
|
|
$
|
(20
|
)
|
|
$
|
316
|
|
|
$
|
(4
|
)
|
|
$
|
69
|
|
|
$
|
(372
|
)
|
|
$
|
(9
|
)
|
|
$
|
(5
|
)
|
|
$
|
246
|
|
|
$
|
(7
|
)
|
|
$
|
(482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See also Note 4 – Investments and Note 6 – Fair Value Measurements.
16
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
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(248
|
)
|
|
$
|
(331
|
)
|
|
$
|
389
|
|
|
$
|
(364
|
)
|
Hedged items
|
|
|
257
|
|
|
|
340
|
|
|
|
(349
|
)
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount of ineffectiveness
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
40
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
(19
|
)
|
|
$
|
15
|
|
|
$
|
(36
|
)
|
|
$
|
(77
|
)
|
Hedged items
|
|
|
19
|
|
|
|
(15
|
)
|
|
|
36
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount of ineffectiveness
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of equity contracts excluded from effectiveness assessment
|
|
$
|
(25
|
)
|
|
$
|
(12
|
)
|
|
$
|
(29
|
)
|
|
$
|
(8
|
)
|
|
|
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
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Effective Portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) recognized in other comprehensive income (net of tax effects of
$3
, $(19),
$7,
and $24)
|
|
$
|
(60
|
)
|
|
$
|
(125
|
)
|
|
$
|
424
|
|
|
$
|
158
|
|
Gains reclassified from accumulated other comprehensive income into revenue
|
|
$
|
167
|
|
|
$
|
171
|
|
|
$
|
414
|
|
|
$
|
461
|
|
|
|
|
|
|
Amount Excluded from Effectiveness Assessment and Ineffective Portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses recognized in other income (expense), net
|
|
$
|
(121
|
)
|
|
$
|
(86
|
)
|
|
$
|
(275
|
)
|
|
$
|
(240
|
)
|
|
|
We estimate that $326 million of net derivative gains included in AOCI as of March 31, 2017 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 and nine months ended March 31, 2017.
17
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
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(115
|
)
|
|
$
|
188
|
|
|
$
|
(120
|
)
|
|
$
|
113
|
|
Equity contracts
|
|
|
(42
|
)
|
|
|
(19
|
)
|
|
|
(84
|
)
|
|
|
(15
|
)
|
Interest rate contracts
|
|
|
8
|
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
4
|
|
Credit contracts
|
|
|
1
|
|
|
|
1
|
|
|
|
5
|
|
|
|
(2
|
)
|
Commodity contracts
|
|
|
(18
|
)
|
|
|
(9
|
)
|
|
|
(18
|
)
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(166
|
)
|
|
$
|
157
|
|
|
$
|
(215
|
)
|
|
$
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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, foreign government bonds, mortgage- and asset-backed securities, U.S. government and agency securities, and certificates of deposit. 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 management’s 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 and liabilities 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.
Our other current financial assets and our current financial liabilities have fair values that approximate their carrying values.
18
PART I
Item 1
Financial
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
1,139
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,139
|
|
|
$
|
0
|
|
|
$
|
1,139
|
|
Commercial paper
|
|
|
0
|
|
|
|
536
|
|
|
|
0
|
|
|
|
536
|
|
|
|
0
|
|
|
|
536
|
|
Certificates of deposit
|
|
|
0
|
|
|
|
1,767
|
|
|
|
0
|
|
|
|
1,767
|
|
|
|
0
|
|
|
|
1,767
|
|
U.S. government and agency securities
|
|
|
101,203
|
|
|
|
3,215
|
|
|
|
0
|
|
|
|
104,418
|
|
|
|
0
|
|
|
|
104,418
|
|
Foreign government bonds
|
|
|
1
|
|
|
|
5,443
|
|
|
|
0
|
|
|
|
5,444
|
|
|
|
0
|
|
|
|
5,444
|
|
Mortgage- and asset-backed securities
|
|
|
0
|
|
|
|
4,249
|
|
|
|
0
|
|
|
|
4,249
|
|
|
|
0
|
|
|
|
4,249
|
|
Corporate notes and bonds
|
|
|
0
|
|
|
|
4,765
|
|
|
|
1
|
|
|
|
4,766
|
|
|
|
0
|
|
|
|
4,766
|
|
Municipal securities
|
|
|
0
|
|
|
|
322
|
|
|
|
0
|
|
|
|
322
|
|
|
|
0
|
|
|
|
322
|
|
Common and preferred stock
|
|
|
4,112
|
|
|
|
1,877
|
|
|
|
18
|
|
|
|
6,007
|
|
|
|
0
|
|
|
|
6,007
|
|
Derivatives
|
|
|
1
|
|
|
|
658
|
|
|
|
0
|
|
|
|
659
|
|
|
|
(270
|
)
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
106,456
|
|
|
$
|
22,832
|
|
|
$
|
19
|
|
|
$
|
129,307
|
|
|
$
|
(270
|
)
|
|
$
|
129,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives and other
|
|
$
|
6
|
|
|
$
|
383
|
|
|
$
|
25
|
|
|
$
|
414
|
|
|
$
|
(267
|
)
|
|
$
|
147
|
|
|
|
(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.
19
PART I
Item 1
The following table reconciles the total “Net Fair Value” of assets abo
ve to the balance sheet presentation of these same assets in Note 4 – Investments.
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
June 30,
2016
|
|
|
|
|
|
|
|
|
|
|
Net fair value of assets measured at fair value on a recurring basis
|
|
$
|
129,037
|
|
|
$
|
119,019
|
|
Cash
|
|
|
3,390
|
|
|
|
3,501
|
|
Common and preferred stock measured at fair value on a nonrecurring basis
|
|
|
856
|
|
|
|
767
|
|
Other investments measured at fair value on a nonrecurring basis
|
|
|
519
|
|
|
|
618
|
|
Less derivative net assets classified as other current and long-term assets
|
|
|
(385
|
)
|
|
|
(246
|
)
|
Other
|
|
|
(18
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded basis of investment components
|
|
$
|
133,399
|
|
|
$
|
123,671
|
|
|
|
|
|
|
|
|
|
|
Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the three and nine months ended March 31, 2017 and 2016, 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
June 30,
2016
|
|
|
|
|
Raw materials
|
|
$
|
555
|
|
|
$
|
612
|
|
Work in process
|
|
|
127
|
|
|
|
158
|
|
Finished goods
|
|
|
1,297
|
|
|
|
1,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,979
|
|
|
$
|
2,251
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 — BUSINESS COMBINATIONS
On December 8, 2016, we completed our acquisition of all issued and outstanding shares of LinkedIn, the world’s largest professional network on the Internet, for a preliminary total purchase price of $27.0 billion. The purchase price primarily consisted of cash of $26.4 billion. The acquisition is expected to accelerate the growth of LinkedIn, Office 365, and Dynamics 365. The financial results of LinkedIn have been included in our consolidated financial statements since the date of the acquisition.
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 becomes available.
20
PART I
Item 1
The major classes of assets and liabilities to which we have preliminarily a
llocated the purchase price were as follows:
(In millions)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,328
|
|
Short-term investments
|
|
|
2,110
|
|
Other current assets
|
|
|
697
|
|
Property and equipment
|
|
|
1,529
|
|
Intangible assets
|
|
|
7,887
|
|
Goodwill
(
a
)
|
|
|
16,687
|
|
Short-term debt
(b)
|
|
|
(1,323
|
)
|
Other current liabilities
|
|
|
(1,117
|
)
|
Deferred income taxes
|
|
|
(657
|
)
|
Other
|
|
|
(132
|
)
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
27,009
|
|
|
|
|
|
|
(a)
|
Goodwill was assigned to our Productivity and Business Processes segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of LinkedIn. None of the goodwill is expected to be deductible for income tax purposes.
|
(b)
|
Convertible senior notes issued by LinkedIn on November 12, 2014, substantially all of which were redeemed after our acquisition of LinkedIn. The remaining $18 million of notes are not redeemable and are included in long-term debt on our consolidated balance sheets. See Note 11 – Debt for further information.
|
Following are the details of the purchase price allocated to the intangible assets acquired:
(In millions)
|
|
Amount
|
|
|
Weighted
Average Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
|
$
|
3,607
|
|
|
|
7 years
|
|
Marketing-related (trade names)
|
|
|
2,148
|
|
|
|
20 years
|
|
Technology-based
|
|
|
2,109
|
|
|
|
3 years
|
|
Contract-based
|
|
|
23
|
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of intangible assets acquired
|
|
$
|
7,887
|
|
|
|
9 years
|
|
|
|
|
|
|
|
|
|
Our consolidated income statements include the following revenue and operating loss attributable to LinkedIn since the date of acquisition:
(In millions)
|
|
Three Months Ended
March 31, 2017
|
|
|
Nine Months Ended
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
975
|
|
|
$
|
1,203
|
|
Operating loss
|
|
$
|
(386
|
)
|
|
$
|
(587
|
)
|
|
|
|
|
|
|
|
Following are the supplemental consolidated financial results of Microsoft Corporation on an unaudited pro forma basis, as if the acquisition had been consummated on July 1, 2015:
(In millions, except earnings per share)
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
22,086
|
|
|
$
|
21,377
|
|
|
$
|
68,357
|
|
|
$
|
67,116
|
|
Net income
|
|
$
|
4,820
|
|
|
$
|
3,402
|
|
|
$
|
14,283
|
|
|
$
|
12,547
|
|
Diluted earnings per share
|
|
$
|
0.62
|
|
|
$
|
0.43
|
|
|
$
|
1.82
|
|
|
$
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
21
PART I
Item 1
adjustments related to purchase accounting, primarily amortization
of intangible assets. Acquisition costs and other nonrecurring charges were immaterial and are included in
the earliest period presented.
NOTE 9
—
GOODWILL
Changes in the carrying amount of goodwill were as follows:
(In millions)
|
|
June 30,
2016
|
|
|
Acquisitions
|
|
|
Other
|
|
|
March 31,
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productivity and Business Processes
|
|
$
|
6,678
|
|
|
$
|
16,854
|
(a)
|
|
$
|
(149
|
)
|
|
$
|
23,383
|
|
Intelligent Cloud
|
|
|
5,467
|
|
|
|
37
|
|
|
|
24
|
|
|
|
5,528
|
|
More Personal Computing
|
|
|
5,727
|
|
|
|
115
|
|
|
|
(85
|
)
|
|
|
5,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,872
|
|
|
$
|
17,006
|
|
|
$
|
(210
|
)
|
|
$
|
34,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes goodwill related to LinkedIn and other acquisitions. See Note 8 – Business Combinations for further information.
|
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.
NOTE 10
—
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
June 30,
2016
|
|
|
|
|
|
|
|
|
Technology-based
(a)
|
|
$
|
7,646
|
|
|
$
|
(3,952
|
)
|
|
$
|
3,694
|
|
|
$
|
5,970
|
|
|
$
|
(3,648
|
)
|
|
$
|
2,322
|
|
Marketing-related
|
|
|
3,999
|
|
|
|
(759
|
)
|
|
|
3,240
|
|
|
|
1,869
|
|
|
|
(616
|
)
|
|
|
1,253
|
|
Contract-based
|
|
|
841
|
|
|
|
(715
|
)
|
|
|
126
|
|
|
|
796
|
|
|
|
(718
|
)
|
|
|
78
|
|
Customer-related
|
|
|
4,044
|
|
|
|
(557
|
)
|
|
|
3,487
|
|
|
|
465
|
|
|
|
(385
|
)
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,530
|
(b)
|
|
$
|
(5,983
|
)
|
|
$
|
10,547
|
|
|
$
|
9,100
|
|
|
$
|
(5,367
|
)
|
|
$
|
3,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Technology-based intangible assets included $73 million and $115 million of net carrying amount of software to be sold, leased, or otherwise marketed as of March 31, 2017 and June 30, 2016, respectively.
|
(b)
|
Includes intangible assets related to LinkedIn and other additions. See Note 8 – Business Combinations for further information.
|
Intangible assets amortization expense was $560 million and $1.1 billion for the three and nine months ended March 31, 2017, respectively, and $249 million and $740 million for the three and nine months ended March 31, 2016, respectively. Amortization of capitalized software was $14 million and $42 million for the three and nine months ended March 31, 2017, respectively, and $18 million and $55 million for the three and nine months ended March 31, 2016, respectively.
22
PART I
Item 1
The following table outlines the estimated future amortization expense related to intangible assets held as of M
arch 31, 2017:
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending June 30,
|
|
|
|
|
|
|
2017 (excluding the nine months ended March 31, 2017)
|
|
$
|
544
|
|
2018
|
|
|
2,145
|
|
2019
|
|
|
1,660
|
|
2020
|
|
|
1,148
|
|
2021
|
|
|
970
|
|
Thereafter
|
|
|
4,080
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,547
|
|
|
|
|
|
|
NOTE 11
—
DEBT
Short-term Debt
As of March 31, 2017, we had $7.2 billion of commercial paper issued and outstanding, with a weighted average interest rate of 0.86% and maturities ranging from 15 days to 266 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 currently have two $5.0 billion credit facilities that expire on October 31, 2017 and November 14, 2018, respectively. These credit facilities serve as a back-up for our commercial paper program. As of March 31, 2017, 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 March 31, 2017, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $76.8 billion and $78.1 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.
23
PART I
Item 1
The components of our long-term debt
, including the current portion, and the associated interest rates were as follows:
Due Date
|
|
|
|
|
Face Value
March 31,
2017
|
|
|
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%
|
|
November 1, 2019
(b)
|
|
|
|
|
|
|
18
|
|
|
|
*
|
|
|
|
0.500%
|
|
|
|
0.500%
|
|
February 6, 2020
(c)
|
|
|
|
|
|
|
1,500
|
|
|
|
*
|
|
|
|
1.850%
|
|
|
|
1.952%
|
|
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
(
d)
|
|
|
|
|
|
|
1,872
|
|
|
|
1,944
|
|
|
|
2.125%
|
|
|
|
2.233%
|
|
February 6, 2022
(c)
|
|
|
|
|
|
|
1,750
|
|
|
|
*
|
|
|
|
2.400%
|
|
|
|
2.520%
|
|
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 6, 2024
(c)
|
|
|
|
|
|
|
2,250
|
|
|
|
*
|
|
|
|
2.875%
|
|
|
|
3.041%
|
|
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%
|
|
February 6, 2027
(c)
|
|
|
|
|
|
|
4,000
|
|
|
|
*
|
|
|
|
3.300%
|
|
|
|
3.383%
|
|
December 6, 2028
(d)
|
|
|
|
|
|
|
1,872
|
|
|
|
1,944
|
|
|
|
3.125%
|
|
|
|
3.218%
|
|
May 2, 2033
(d)
|
|
|
|
|
|
|
588
|
|
|
|
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%
|
|
February 6, 2037
(c)
|
|
|
|
|
|
|
2,500
|
|
|
|
*
|
|
|
|
4.100%
|
|
|
|
4.152%
|
|
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 6, 2047
(c)
|
|
|
|
|
|
|
3,000
|
|
|
|
*
|
|
|
|
4.250%
|
|
|
|
4.287%
|
|
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%
|
|
February 6, 2057
(c)
|
|
|
|
|
|
|
2,000
|
|
|
|
*
|
|
|
|
4.500%
|
|
|
|
4.528%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
77,550
|
|
|
$
|
40,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
In August 2016, we issued $19.8 billion of debt securities.
|
24
PART I
Item 1
(b)
|
Remaining notes that were acquired as part of the LinkedIn acquisition.
See Note 8 – Business
C
ombinations
for further information.
|
(c)
|
In February 2017, we issued $17.0 billion of debt securities.
|
(d)
|
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 March 31, 2017 and June 30, 2016, the combined aggregate unamortized discount and debt issuance costs associated with our long-term debt, including the current portion, were $729 million and $392 million, respectively.
NOTE 12
—
INCOME TAXES
Our effective tax rate for the three months ended March 31, 2017 and 2016 was 19% and 25%, respectively, and our effective tax rate for each of the nine months ended March 31, 2017 and 2016 was 17%. 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.
This quarter’s effective tax rate was lower than the prior year’s third quarter effective tax rate, primarily due to changes in the mix of our income before income taxes between the U.S. and foreign countries and an increase in the tax benefits related to stock-based compensation.
Tax contingencies and other income tax liabilities were $14.4 billion and $11.8 billion as of March 31, 2017 and June 30, 2016, respectively, and are included in other long-term liabilities. This increase relates primarily to current period intercompany transfer pricing and foreign tax credits.
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. We also continue to be subject to examination by the IRS for tax years 2010 to 2016. 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 March 31, 2017, 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 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 2017, 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 13
—
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 fiscal year 2017.
25
PART I
Item 1
2016 Restructuring
In the fourth quarter of fiscal year 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.
Restructuring charges associated with each of these plans were included in impairment, integration, and restructuring expenses on our consolidated income statements, 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
|
|
|
(327
|
)
|
|
|
(76
|
)
|
|
|
(403
|
)
|
Other
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring liability as of March 31, 2017
|
|
$
|
136
|
|
|
$
|
161
|
|
|
$
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Primarily reflects activities associated with the consolidation of our facilities and manufacturing operations, including contract termination costs and asset write-downs.
|
NOTE 14
—
UNEARNED REVENUE
Unearned revenue by segment was as follows:
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
|
June 30,
2016
|
|
|
|
|
Productivity and Business Processes
|
|
$
|
11,159
|
|
|
$
|
12,497
|
|
Intelligent Cloud
|
|
|
9,722
|
|
|
|
11,472
|
|
More Personal Computing
|
|
|
2,930
|
|
|
|
3,334
|
|
Corporate and Other
(a)
|
|
|
11,922
|
|
|
|
6,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35,733
|
|
|
$
|
33,909
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Consists of the net revenue deferral from Windows 10.
|
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.
NOTE 15
—
COMMITMENTS AND CONTINGENCIES
Capital Lease Commitments
We have capital leases for datacenters and corporate offices. As of March 31, 2017 and June 30, 2016, assets recorded under capital leases were $1.9 billion and $865 million, respectively, and accumulated depreciation associated with capital leases was $124 million and $57 million, respectively. For the three and nine months ended March 31, 2017, property and equipment acquired under capital leases was $296 million and $1.1 billion, respectively. For both the three and nine months ended March 31, 2016, property and equipment acquired under capital leases was $97 million. As of March 31, 2017 and June 30, 2016, capital lease obligations included in other current liabilities were $86 million and $25 million, respectively, and capital lease obligations included in other long-term liabilities were $1.7 billion and $761 million, respectively.
26
PART I
Item 1
Future minimum lease payments under non-cancellable capital leases as of March 31, 2017 were as follows:
(In millions)
|
|
|
|
|
|
|
|
Year Ending June 30,
|
|
|
|
|
|
2017 (excluding the nine months ended March 31, 2017)
|
|
$
|
35
|
|
2018
|
|
|
149
|
|
2019
|
|
|
155
|
|
2020
|
|
|
159
|
|
2021
|
|
|
163
|
|
Thereafter
|
|
|
1,826
|
|
|
|
|
|
|
|
|
Total
(a)
|
|
$
|
2,487
|
|
|
|
|
|
|
(a)
|
Includes imputed interest of $660 million.
|
As of March 31, 2017, we had additional purchase obligations for capital leases executed but not yet recorded of $4.1 billion.
Contingencies
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’s appeal of this decision was heard by the U.S. Court of Appeals for the Federal Circuit on April 7, 2017. 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.
European copyright levies
We assumed from Nokia all potential liability due to Nokia’s 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 through 2007. In July
27
PART I
Item 1
2016, the German Supreme Court heard ou
r appeal contesting the legality of the levy assessed on phones with music players and over five megabytes of memory. The Supreme Court issued a ruling in December 2016, finding that the levy may not be appropriate for phones that have the ability to recei
ve music files only via Bluetooth or infrared inputs, and remanded for further proceedings. A new case schedule has not been set, and we are participating in industry-wide settlement negotiations with the collecting society.
Other patent and intellectual property claims
In addition to these cases, there were 43 other patent infringement cases pending against Microsoft as of March 31, 2017.
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 China’s State Administration for Industry and Commerce (“SAIC”) had begun a formal investigation relating to China’s 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 Nokia’s 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 trial court granted in part and denied in part defendants’ motion to exclude plaintiffs’ general causation experts. The defendants filed an interlocutory appeal challenging the standard for evaluating expert scientific evidence, which the District of Columbia Court of Appeals heard
en banc
. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by defendants and remanding the cases to the trial court for further proceedings under that standard. Plaintiffs have filed a motion to reopen discovery and file additional expert evidence.
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
28
PART I
Item 1
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 has been dormant for more than two years.
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 management’s view of these matters may change in the future.
As of March 31, 2017, we accrued aggregate legal liabilities of $443 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $1.5 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 16
—
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. This share repurchase program became effective on October 1, 2013, and was completed on December 22, 2016.
On September 20, 2016, our Board of Directors approved a share repurchase program authorizing up to an additional $40.0 billion in share repurchases. This share repurchase program commenced on December 22, 2016 following completion of the prior program approved on September 16, 2013, has no expiration date, and may be suspended or discontinued at any time without notice. As of March 31, 2017, $38.4 billion remained of this $40.0 billion share repurchase program.
We repurchased the following shares of common stock under the share repurchase programs:
(In millions)
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2017
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
First Quarter
(a)
|
|
|
63
|
|
|
$
|
3,550
|
|
|
|
89
|
|
|
$
|
4,000
|
|
Second Quarter
(a)
|
|
|
59
|
|
|
|
3
,
533
|
|
|
|
66
|
|
|
|
3,600
|
|
Third Quarter
|
|
|
25
|
|
|
|
1,600
|
(b)
|
|
|
69
|
|
|
|
3,600
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
147
|
|
|
$
|
8,683
|
|
|
|
224
|
|
|
$
|
11,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Repurchased under the share repurchase program approved September 16, 2013.
|
(b)
|
Repurchased under the share repurchase program approved September 20, 2016.
|
The above table excludes shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards. All repurchases were made using cash resources.
Dividends
Our Board of Directors declared the following dividends:
Declaration Date
|
|
Dividend
Per Share
|
|
|
Record Date
|
|
|
Total Amount
|
|
|
Payment Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 20, 2016
|
|
$
|
0.39
|
|
|
|
November 17, 2016
|
|
|
$
|
3,024
|
|
|
|
December 8, 2016
|
|
November 30, 2016
|
|
$
|
0.39
|
|
|
|
February 16, 2017
|
|
|
$
|
3,012
|
|
|
|
March 9, 2017
|
|
March 14, 2017
|
|
$
|
0.39
|
|
|
|
May 18, 2017
|
|
|
$
|
3,012
|
|
|
|
June 8, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
PART I
Item 1
Declaration Date
|
|
Dividend
Per Share
|
|
|
Record Date
|
|
|
Total Amount
|
|
|
Payment Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
Fiscal year 2016
|
|
|
|
|
|
|
|
|
|
September 15, 2015
|
|
$
|
0.36
|
|
|
|
November 19, 2015
|
|
|
$
|
2,868
|
|
|
|
December 10, 2015
|
|
December 2, 2015
|
|
$
|
0.36
|
|
|
|
February 18, 2016
|
|
|
$
|
2,842
|
|
|
|
March 10, 2016
|
|
March 15, 2016
|
|
$
|
0.36
|
|
|
|
May 19, 2016
|
|
|
$
|
2,821
|
|
|
|
June 9, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dividend declared on March 14, 2017 was included in other current liabilities as of March 31, 2017.
NOTE 17
—
ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table summarizes the changes in accumulated other comprehensive income by component:
(In millions)
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income balance, beginning of period
|
|
$
|
595
|
|
|
$
|
598
|
|
|
$
|
352
|
|
|
$
|
590
|
|
Unrealized gains (losses), net of tax effects of
$3
, $(19),
$7
, and $24
|
|
|
(60
|
)
|
|
|
(125
|
)
|
|
|
424
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments for gains included in revenue
|
|
|
(167
|
)
|
|
|
(171
|
)
|
|
|
(414
|
)
|
|
|
(461
|
)
|
Tax expense included in provision for income taxes
|
|
|
2
|
|
|
|
11
|
|
|
|
8
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(165
|
)
|
|
|
(160
|
)
|
|
|
(406
|
)
|
|
|
(435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
(225
|
)
|
|
|
(285
|
)
|
|
|
18
|
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income balance, end of period
|
|
$
|
370
|
|
|
$
|
313
|
|
|
$
|
370
|
|
|
$
|
313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income balance, beginning of period
|
|
$
|
2,030
|
|
|
$
|
2,758
|
|
|
$
|
2,941
|
|
|
$
|
3,169
|
|
Unrealized gains, net of tax effects of
$307,
$217,
$197
, and $34
|
|
|
571
|
|
|
|
402
|
|
|
|
367
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments for gains included in other income (expense), net
|
|
|
(779
|
)
|
|
|
(88
|
)
|
|
|
(1,867
|
)
|
|
|
(200
|
)
|
Tax expense included in provision for income taxes
|
|
|
273
|
|
|
|
31
|
|
|
|
654
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(506
|
)
|
|
|
(57
|
)
|
|
|
(1,213
|
)
|
|
|
(130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
65
|
|
|
|
345
|
|
|
|
(846
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income balance, end of period
|
|
$
|
2,095
|
|
|
$
|
3,103
|
|
|
$
|
2,095
|
|
|
$
|
3,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss balance, beginning of period
|
|
$
|
(2,113
|
)
|
|
$
|
(1,583
|
)
|
|
$
|
(1,756
|
)
|
|
$
|
(1,237
|
)
|
Translation adjustments and other, net of tax effects of
$0
, $3,
$7
, and $(18)
|
|
|
292
|
|
|
|
7
|
|
|
|
(65
|
)
|
|
|
(339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss balance, end of period
|
|
$
|
(1,821
|
)
|
|
$
|
(1,576
|
)
|
|
$
|
(1,821
|
)
|
|
$
|
(1,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, end of period
|
|
$
|
644
|
|
|
$
|
1,840
|
|
|
$
|
644
|
|
|
$
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 18
—
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.
30
PART I
Item 1
In December 2016, we completed our acquisition
of LinkedIn. LinkedIn is reported as part of our Productivity and Business Processes segment. LinkedIn offers services that can be used by customers to transform the way they hire, market, sell, and learn on a global basis through Talent Solutions, Market
ing Solutions, and Premium Subscriptions.
|
•
|
Talent Solutions is comprised of Hiring and Learning and Development. Hiring provides services to recruiters that enable them to attract, recruit, and hire talent. Learning and Development provides subscriptions to enterprises and individuals to online learning content.
|
|
•
|
Marketing Solutions enable enterprises and individuals to advertise to LinkedIn’s member base through relevant content. Advertising (consisting of content-based, graphic display, text link, and programmatic) is shown primarily on LinkedIn.com and its mobile applications.
|
|
•
|
Premium Subscriptions (inclusive of Sales Solutions) enable professionals to manage their professional identity, grow their network, and connect with talent.
|
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.
|
|
•
|
Microsoft
Dynamics (“Dynamics”) business solutions, including Dynamics ERP on-premises, Dynamics CRM on-premises, and Dynamics 365, a set of cloud-based applications across ERP and CRM.
|
|
•
|
LinkedIn, including Talent Solutions, Marketing Solutions, and Premium Subscriptions.
|
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
31
PART I
Item 1
certain contracts is allocated among the segme
nts 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.
Segment revenue and operating income (loss) were as follows during the periods presented:
(In millions)
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productivity and Business Processes
|
|
$
|
7,958
|
|
|
$
|
6,521
|
|
|
$
|
21,998
|
|
|
$
|
19,517
|
|
Intelligent Cloud
|
|
|
6,763
|
|
|
|
6,096
|
|
|
|
20,006
|
|
|
|
18,331
|
|
More Personal Computing
|
|
|
8,836
|
|
|
|
9,539
|
|
|
|
29,953
|
|
|
|
31,474
|
|
Corporate and Other
(a)
|
|
|
(1,467
|
)
|
|
|
(1,625
|
)
|
|
|
(5,324
|
)
|
|
|
(4,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,090
|
|
|
$
|
20,531
|
|
|
$
|
66,633
|
|
|
$
|
64,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Productivity and Business Processes
|
|
$
|
2,783
|
|
|
$
|
2,981
|
|
|
$
|
9,159
|
|
|
$
|
9,429
|
|
Intelligent Cloud
|
|
|
2,181
|
|
|
|
2,176
|
|
|
|
6,637
|
|
|
|
7,135
|
|
More Personal Computing
|
|
|
2,097
|
|
|
|
1,751
|
|
|
|
6,524
|
|
|
|
5,154
|
|
Corporate and Other
(a)
|
|
|
(1,467
|
)
|
|
|
(1,625
|
)
|
|
|
(5,324
|
)
|
|
|
(4,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,594
|
|
|
$
|
5,283
|
|
|
$
|
16,996
|
|
|
$
|
17,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Consists of the net revenue deferral from 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.
32
PART I
Item 1