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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number: 001-35992

 

Oracle Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

54-2185193

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

500 Oracle Parkway

 

94065

Redwood City, California 

(Address of principal executive offices)

 

(Zip Code)

 

(650) 506-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

2.25% senior notes due January 2021 

3.125% senior notes due July 2025 

ORCL

New York Stock Exchange

New York Stock Exchange 

New York Stock Exchange 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    ☒  No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   

 

Accelerated Filer   

Non-Accelerated Filer   

 

Smaller reporting company   

Emerging growth company   

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No    ☒

The number of shares of registrant’s common stock outstanding as of September 10, 2019 was: 3,288,330,000.

 

 

 


Table of Contents

 

ORACLE CORPORATION 

FORM 10-Q QUARTERLY REPORT

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of August 31, 2019 and May 31, 2019

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended August 31, 2019 and 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended August 31, 2019 and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Equity for the Three Months Ended August 31, 2019 and 2018

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended August 31, 2019 and 2018

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

44

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

44

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

46

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

46

 

 

 

 

 

Item 1A.

 

Risk Factors

 

46

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

 

 

 

 

 

Item 6.

 

Exhibits

 

47

 

 

 

 

 

 

 

Signatures

 

48

 

 

 

 


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Cautionary Note on Forward-Looking Statements

For purposes of this Quarterly Report, the terms “Oracle,” “we,” “us” and “our” refer to Oracle Corporation and its consolidated subsidiaries. This Quarterly Report on Form 10-Q contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or otherwise contain forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These include, among other things, statements regarding:

 

our expectation that we may acquire companies, products, services and technologies to further our corporate strategy as compelling opportunities become available;

 

our expectation that, on a constant currency basis, our total cloud and license revenues generally will continue to increase due to expected growth in our cloud services and our license support offerings, and continued demand for our cloud license and on-premise license offerings;

 

our belief that our Oracle Cloud Software-as-a-Service and Infrastructure-as-a-Service (SaaS and IaaS, respectively, and collectively, Oracle Cloud Services) offerings are opportunities for us to expand our cloud and license business, and that demand for our Oracle Cloud Services will continue to increase;

 

our expectation that substantially all of our customers will renew their license support contracts annually;

 

our expectation that our hardware business will have lower operating margins as a percentage of revenues than our cloud and license business;

 

our expectation that we will continue to make significant investments in research and development, and our belief that research and development efforts are essential to maintaining our competitive position;

 

our expectation that our international operations will continue to provide a significant portion of our total revenues and expenses;

 

the sufficiency of our sources of funding for working capital, capital expenditures, contractual obligations, acquisitions, dividends, stock repurchases, debt repayments and other matters;

 

our belief that we have adequately provided under U.S. generally accepted accounting principles for outcomes related to our tax audits and that the final outcome of our tax related examinations, agreements or judicial proceedings will not have a material effect on our results of operations, and our belief that our net deferred tax assets will be realized in the foreseeable future;

 

our belief that the outcome of certain legal proceedings and claims to which we are a party will not, individually or in the aggregate, result in losses that are materially in excess of amounts already recognized, if any;

 

the possibility that certain legal proceedings to which we are a party could have a material impact on our future cash flows and results of operations;

 

our expectations regarding the timing and amount of expenses relating to the Fiscal 2019 Oracle Restructuring Plan and the improved efficiencies in our operations that such a plan will create;

 

the timing and amount of future cash dividend payments and stock repurchases, including our expectation that the levels of our future stock repurchase activity may be modified in comparison to past periods in order to use available cash for other purposes;

 

our expectations regarding the impact of recent accounting pronouncements on our consolidated financial statements;

1


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our expectation that, to the extent customers renew support contracts or cloud SaaS and IaaS contracts from companies that we have acquired, we will recognize revenues for the full contracts’ values over the respective renewal periods;

 

our ability to predict quarterly hardware revenues;

 

the percentage of remaining performance obligations that we expect to recognize as revenues over the next twelve months;

as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may be preceded by, followed by or include the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “strives,” “estimates,” “will,” “should,” “is designed to” and similar expressions. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about our business that could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors” included in documents we file from time to time with the U.S. Securities and Exchange Commission (the SEC), including our Annual Report on Form 10-K for our fiscal year ended May 31, 2019 and our other Quarterly Reports on Form 10-Q to be filed by us in our fiscal 2020, which runs from June 1, 2019 to May 31, 2020.

We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. New information, future events or risks could cause the forward-looking events we discuss in this Quarterly Report not to occur. You should not place undue reliance on these forward-looking statements, which reflect our expectations only as of the date of this Quarterly Report.

2


Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

ORACLE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

As of August 31, 2019 and May 31, 2019

(Unaudited)

 

(in millions, except per share data)

 

August 31,

2019

 

 

May 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,083

 

 

$

20,514

 

Marketable securities

 

 

4,621

 

 

 

17,313

 

Trade receivables, net of allowances for doubtful accounts of $383 and $371 as of August 31, 2019 and May 31, 2019, respectively

 

 

3,820

 

 

 

5,134

 

Prepaid expenses and other current assets

 

 

2,860

 

 

 

3,425

 

Total current assets

 

 

42,384

 

 

 

46,386

 

Non-current assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

6,264

 

 

 

6,252

 

Intangible assets, net

 

 

4,861

 

 

 

5,279

 

Goodwill, net

 

 

43,733

 

 

 

43,779

 

Deferred tax assets

 

 

2,654

 

 

 

2,696

 

Other non-current assets

 

 

6,333

 

 

 

4,317

 

Total non-current assets

 

 

63,845

 

 

 

62,323

 

Total assets

 

$

106,229

 

 

$

108,709

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Notes payable, current

 

$

3,748

 

 

$

4,494

 

Accounts payable

 

 

486

 

 

 

580

 

Accrued compensation and related benefits

 

 

1,261

 

 

 

1,628

 

Deferred revenues

 

 

10,089

 

 

 

8,374

 

Other current liabilities

 

 

3,291

 

 

 

3,554

 

Total current liabilities

 

 

18,875

 

 

 

18,630

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Notes payable and other borrowings, non-current

 

 

50,692

 

 

 

51,673

 

Income taxes payable

 

 

13,501

 

 

 

13,295

 

Other non-current liabilities

 

 

4,142

 

 

 

2,748

 

Total non-current liabilities

 

 

68,335

 

 

 

67,716

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Oracle Corporation stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value—authorized: 1.0 shares; outstanding: none

 

 

 

 

 

 

Common stock, $0.01 par value and additional paid in capital—authorized: 11,000 shares; outstanding: 3,296 shares and 3,359 shares as of August 31, 2019 and May 31, 2019, respectively

 

 

26,450

 

 

 

26,909

 

Accumulated deficit

 

 

(6,446

)

 

 

(3,496

)

Accumulated other comprehensive loss

 

 

(1,571

)

 

 

(1,628

)

Total Oracle Corporation stockholders’ equity

 

 

18,433

 

 

 

21,785

 

Noncontrolling interests

 

 

586

 

 

 

578

 

Total equity

 

 

19,019

 

 

 

22,363

 

Total liabilities and equity

 

$

106,229

 

 

$

108,709

 

 

See notes to condensed consolidated financial statements.

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Table of Contents

 

ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended August 31, 2019 and 2018

(Unaudited)

 

 

 

Three Months Ended

August 31,

 

(in millions, except per share data)

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

Cloud services and license support

 

$

6,805

 

 

$

6,609

 

Cloud license and on-premise license

 

 

812

 

 

 

867

 

Hardware

 

 

815

 

 

 

904

 

Services

 

 

786

 

 

 

813

 

Total revenues

 

 

9,218

 

 

 

9,193

 

Operating expenses:

 

 

 

 

 

 

 

 

Cloud services and license support(1)

 

 

982

 

 

 

913

 

Hardware(1)

 

 

272

 

 

 

326

 

Services(1)

 

 

703

 

 

 

714

 

Sales and marketing(1)

 

 

2,018

 

 

 

2,039

 

Research and development

 

 

1,557

 

 

 

1,564

 

General and administrative

 

 

292

 

 

 

321

 

Amortization of intangible assets

 

 

414

 

 

 

434

 

Acquisition related and other

 

 

25

 

 

 

14

 

Restructuring

 

 

78

 

 

 

90

 

Total operating expenses

 

 

6,341

 

 

 

6,415

 

Operating income

 

 

2,877

 

 

 

2,778

 

Interest expense

 

 

(494

)

 

 

(529

)

Non-operating income, net

 

 

99

 

 

 

291

 

Income before provision for income taxes

 

 

2,482

 

 

 

2,540

 

Provision for income taxes

 

 

345

 

 

 

275

 

Net income

 

$

2,137

 

 

$

2,265

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.64

 

 

$

0.58

 

Diluted

 

$

0.63

 

 

$

0.57

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

3,317

 

 

 

3,904

 

Diluted

 

 

3,410

 

 

 

3,999

 

 

(1)

Exclusive of amortization of intangible assets, which is shown separately.

 

 

 

See notes to condensed consolidated financial statements.

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Table of Contents

 

ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended August 31, 2019 and 2018

(Unaudited)

 

 

 

Three Months Ended

August 31,

 

(in millions)

 

2019

 

 

2018

 

Net income

 

$

2,137

 

 

$

2,265

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Net foreign currency translation losses

 

 

(8

)

 

 

(61

)

Net unrealized gains on defined benefit plans

 

 

4

 

 

 

6

 

Net unrealized gains on marketable securities

 

 

85

 

 

 

4

 

Net unrealized losses on cash flow hedges

 

 

(24

)

 

 

(26

)

Total other comprehensive income (loss), net

 

 

57

 

 

 

(77

)

Comprehensive income

 

$

2,194

 

 

$

2,188

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

5


Table of Contents

 

ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended August 31, 2019 and 2018

(Unaudited)

 

 

 

Three Months Ended

August 31,

 

(in millions, except per share data)

 

2019

 

 

2018

 

Common stock and additional paid in capital

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

26,909

 

 

$

28,950

 

Common stock issued

 

 

316

 

 

 

299

 

Stock-based compensation

 

 

446

 

 

 

436

 

Repurchase of common stock

 

 

(707

)

 

 

(1,496

)

Other, net

 

 

(514

)

 

 

(378

)

Balance, end of period

 

$

26,450

 

 

$

27,811

 

(Accumulated deficit) retained earnings

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(3,496

)

 

$

19,111

 

Cumulative-effect of accounting change

 

 

 

 

 

(110

)

Repurchase of common stock

 

 

(4,293

)

 

 

(8,504

)

Cash dividends declared

 

 

(795

)

 

 

(742

)

Net income

 

 

2,137

 

 

 

2,265

 

Other, net

 

 

1

 

 

 

2

 

Balance, end of period

 

$

(6,446

)

 

$

12,022

 

Other equity, net

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(1,050

)

 

$

(1,188

)

Other comprehensive income (loss), net

 

 

57

 

 

 

(77

)

Other, net

 

 

8

 

 

 

(4

)

Balance, end of period

 

$

(985

)

 

$

(1,269

)

Total stockholders' equity

 

$

19,019

 

 

$

38,564

 

Cash dividends declared per common share

 

$

0.24

 

 

$

0.19

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

 

ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended August 31, 2019 and 2018

(Unaudited)

 

 

 

Three Months Ended

August 31,

 

(in millions)

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,137

 

 

$

2,265

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

336

 

 

 

286

 

Amortization of intangible assets

 

 

414

 

 

 

434

 

Deferred income taxes

 

 

(14

)

 

 

(112

)

Stock-based compensation

 

 

446

 

 

 

436

 

Other, net

 

 

60

 

 

 

52

 

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

 

 

 

Decrease in trade receivables, net

 

 

1,313

 

 

 

1,390

 

Decrease in prepaid expenses and other assets

 

 

481

 

 

 

309

 

Decrease in accounts payable and other liabilities

 

 

(813

)

 

 

(561

)

(Decrease) increase in income taxes payable

 

 

(121

)

 

 

10

 

Increase in deferred revenues

 

 

1,761

 

 

 

2,213

 

Net cash provided by operating activities

 

 

6,000

 

 

 

6,722

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities and other investments

 

 

(216

)

 

 

(739

)

Proceeds from maturities of marketable securities and other investments

 

 

879

 

 

 

4,704

 

Proceeds from sales of marketable securities

 

 

12,111

 

 

 

 

Acquisitions, net of cash acquired

 

 

(2

)

 

 

(50

)

Capital expenditures

 

 

(386

)

 

 

(383

)

Net cash provided by investing activities

 

 

12,386

 

 

 

3,532

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments for repurchases of common stock

 

 

(5,005

)

 

 

(9,967

)

Proceeds from issuances of common stock

 

 

316

 

 

 

291

 

Shares repurchased for tax withholdings upon vesting of restricted stock-based awards

 

 

(514

)

 

 

(379

)

Payments of dividends to stockholders

 

 

(795

)

 

 

(742

)

Repayments of borrowings

 

 

(1,750

)

 

 

(2,500

)

Other, net

 

 

(54

)

 

 

(36

)

Net cash used for financing activities

 

 

(7,802

)

 

 

(13,333

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(15

)

 

 

(86

)

Net increase (decrease) in cash and cash equivalents

 

 

10,569

 

 

 

(3,165

)

Cash and cash equivalents at beginning of period

 

 

20,514

 

 

 

21,620

 

Cash and cash equivalents at end of period

 

$

31,083

 

 

$

18,455

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

 

Fair values of restricted stock-based awards and stock options assumed in connection with acquisitions

 

$

 

 

$

8

 

Change in unsettled repurchases of common stock

 

$

(5

)

 

$

33

 

 

See notes to condensed consolidated financial statements.

 

7


Table of Contents

 

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

August 31, 2019

(Unaudited)

 

1.

BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

Basis of Presentation

We have prepared the condensed consolidated financial statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures herein are adequate to ensure the information presented is not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2019.

We believe that all necessary adjustments, which consisted only of normal recurring items, have been included in the accompanying financial statements to present fairly the results of the interim periods. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for our fiscal year ending May 31, 2020.

During the first quarter of fiscal 2020, we adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). Topic 842 requires companies to generally recognize on the balance sheet, operating and financing lease liabilities and corresponding right-of-use (ROU) assets. We adopted this new standard using the effective date of June 1, 2019 as our initial application date. Consequently, financial information for the comparative periods was not updated. We elected the package of practical expedients permitted under the transition guidance of the new standard, which allows us to carry forward our historical lease classification. The adoption of Topic 842 did not result in a cumulative catch-up adjustment to the opening of accumulated deficit balance as of June 1, 2019. There was no material impact to our condensed consolidated statements of operations and condensed consolidated statements of cash flows for the three months ended August 31, 2019 due to the adoption of Topic 842. Except for the updates to our leases accounting policy noted below, there have been no other changes to our significant accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2019 that had a significant impact on our condensed consolidated financial statements or notes thereto as of and for the three months ended August 31, 2019.

Leases

We determine if an arrangement is a lease at its inception. Operating lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments, because the implicit rate of the lease is generally not known. ROU assets related to our operating lease liabilities are measured at lease inception based on the initial measurement of the lease liability, plus any prepaid lease payments and less any lease incentives. Our lease terms that are used in determining our operating lease liabilities at lease inception may include options to extend or terminate the leases when it is reasonably certain that we will exercise such options. We amortize our ROU assets as operating lease expense generally on a straight-line basis over the lease term and classify both the lease amortization and imputed interest as operating expenses. We have lease agreements with lease and non-lease components, and in such cases, we generally account for the components as a single lease component.

We have operating leases that primarily relate to certain of our facilities, data centers and vehicles. As of August 31, 2019, our operating leases substantially have remaining terms of one year to thirteen years, some of which include options to extend and/or terminate the leases. We do not recognize lease assets and lease liabilities for any lease with an original lease term of less than one year.

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Table of Contents

 

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2019

(Unaudited)

 

At August 31, 2019, ROU assets of $2.0 billion related to our operating leases are included in other non-current assets; and operating lease liabilities of $587 million are included in other current liabilities; and $1.5 billion are included in other non-current liabilities in our condensed consolidated balance sheets. Cash flow movements related to our lease activities are included in prepaid expenses and other assets and accounts payables and other liabilities as presented in net cash provided by operating activities in our condensed consolidated statement of cash flows for the three months ended August 31, 2019.  

For the three months ended August 31, 2019, operating lease expenses totaled $148 million, net of sublease income of $4 million, and cash paid for amounts included in the measurement of operating lease liabilities was $148 million. We recorded ROU assets of $2.2 billion in exchange for operating lease obligations during the three months ended August 31, 2019, which included $1.9 billion for operating leases existing on June 1, 2019 that were recognized upon our initial adoption of Topic 842 and $211 million for operating leases that were contracted during the first quarter of fiscal 2020. As of August 31, 2019, the weighted average remaining lease term for operating leases was approximately five years, and the weighted average discount rate for operating leases was 3.1%.

Maturities of operating lease liabilities were as follows as of August 31, 2019 (in millions):

 

 

Remainder of fiscal 2020

 

$

498

 

Fiscal 2021

 

 

550

 

Fiscal 2022

 

 

429

 

Fiscal 2023

 

 

270

 

Fiscal 2024

 

 

177

 

Fiscal 2025

 

 

125

 

Thereafter

 

 

218

 

Total operating lease payments

 

 

2,267

 

Less: imputed interest

 

 

(206

)

Total operating lease liability

 

$

2,061

 

 

Remaining Performance Obligations from Contracts with Customers

Trade receivables, net of allowance for doubtful accounts, and deferred revenues are reported net of related uncollected deferred revenues in our condensed consolidated balance sheets as of August 31, 2019 and May 31, 2019. The amount of revenues recognized during each of the three months ended August 31, 2019 and 2018 that were included in the opening deferred revenues balance as of May 31, 2019 and 2018 were each approximately $3.5 billion. Revenues recognized from performance obligations satisfied in prior periods and impairment losses recognized on our receivables were immaterial in each of the three months ended August 31, 2019 and 2018.  

Remaining performance obligations, as defined in Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2019, were $33.8 billion as of August 31, 2019, approximately 61% of which we expect to recognize as revenues over the next twelve months and the remainder thereafter.

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Table of Contents

 

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2019

(Unaudited)

 

Sales of Financing Receivables

We offer certain of our customers the option to acquire our software products, hardware products and services offerings through separate long-term payment contracts. We generally sell these contracts that we have financed for our customers on a non-recourse basis to financial institutions within 90 days of the contracts’ dates of execution. We record the transfers of amounts due from customers to financial institutions as sales of financing receivables because we are considered to have surrendered control of these financing receivables. Financing receivables sold to financial institutions were $705 million and $822 million for the three months ended August 31, 2019 and 2018, respectively.

Cash, Cash Equivalents and Restricted Cash

Restricted cash that was included within cash and cash equivalents as presented within our condensed consolidated balance sheets as of August 31, 2019 and May 31, 2019 and our condensed consolidated statements of cash flows for the three months ended August 31, 2019 and 2018 was nominal.

Acquisition Related and Other Expenses

Acquisition related and other expenses primarily consist of personnel related costs for transitional and certain other employees, integration related professional services, certain business combination adjustments including adjustments after the measurement period has ended and certain other operating items, net.

 

 

 

Three Months Ended

August 31,

 

(in millions)

 

2019

 

 

2018

 

Transitional and other employee related costs

 

$

4

 

 

$

14

 

Business combination adjustments, net

 

 

3

 

 

 

(2

)

Other, net

 

 

18

 

 

 

2

 

Total acquisition related and other expenses

 

$

25

 

 

$

14

 

Non-Operating Income, net

Non-operating income, net consists primarily of interest income, net foreign currency exchange losses, the noncontrolling interests in the net profits of our majority-owned subsidiaries (primarily Oracle Financial Services Software Limited and Oracle Corporation Japan) and net other income, including net realized gains and losses related to all of our investments, net unrealized gains and losses related to the small portion of our investment portfolio related to our deferred compensation plan, net unrealized gains and losses related to certain equity securities and non-service net periodic pension income (losses).

 

 

 

Three Months Ended

August 31,

 

(in millions)

 

2019

 

 

2018

 

Interest income

 

$

190

 

 

$

348

 

Foreign currency losses, net

 

 

(55

)

 

 

(34

)

Noncontrolling interests in income

 

 

(40

)

 

 

(39

)

Other income, net

 

 

4

 

 

 

16

 

Total non-operating income, net

 

$

99

 

 

$

291

 

 

10


Table of Contents

 

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2019

(Unaudited)

 

Recent Accounting Pronouncements

Financial Instruments:  In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 is effective for us in our first quarter of fiscal 2021, and earlier adoption is permitted beginning in the first quarter of fiscal 2020. We are currently evaluating the impact of our pending adoption of Topic 326 on our consolidated financial statements.

 

2.

ACQUISITIONS

Fiscal 2020 and 2019 Acquisitions

During the first quarter of fiscal 2020 and full year of fiscal 2019, we acquired certain companies and purchased certain technology and development assets primarily to expand our products and services offerings. These acquisitions were not significant individually or in the aggregate to our condensed consolidated financial statements.

 

 

3.

FAIR VALUE MEASUREMENTS

We perform fair value measurements in accordance with FASB Accounting Standards Codification (ASC) 820, Fair Value Measurement. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions and risk of nonperformance.

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or a liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

 

Level 1:  quoted prices in active markets for identical assets or liabilities;

 

Level 2:  inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

 

Level 3:  unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

11


Table of Contents

 

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2019

(Unaudited)

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Our assets and liabilities measured at fair value on a recurring basis consisted of the following (Level 1 and Level 2 inputs are defined above):

 

 

 

August 31, 2019

 

 

May 31, 2019

 

 

 

Fair Value Measurements

Using Input Types

 

 

 

 

 

 

Fair Value Measurements

Using Input Types

 

 

 

 

 

(in millions)

 

Level 1

 

 

Level 2

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities and other

 

$

6,081

 

 

$

6,995

 

 

$

13,076

 

 

$

4,899

 

 

$

17,343

 

 

$

22,242

 

Commercial paper debt securities

 

 

 

 

 

11,406

 

 

 

11,406

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

1,350

 

 

 

 

 

 

1,350

 

 

 

5,700

 

 

 

 

 

 

5,700

 

Derivative financial instruments

 

 

 

 

 

17

 

 

 

17

 

 

 

 

 

 

5

 

 

 

5

 

Total assets

 

$

7,431

 

 

$

18,418

 

 

$

25,849

 

 

$

10,599

 

 

$

17,348

 

 

$

27,947

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

 

$

249

 

 

$

249

 

 

$

 

 

$

230

 

 

$

230

 

 

We classify our marketable securities as available-for-sale debt securities at the time of purchase and reevaluate such classification as of each balance sheet date. Our marketable securities investments consist of Tier 1 commercial paper debt securities, corporate debt securities and certain other securities. Marketable securities as presented per our condensed consolidated balance sheets included securities with original maturities at the time of purchase greater than three months and the remainder of the securities were included in cash and cash equivalents. As of August 31, 2019 and May 31, 2019, approximately 88% and 33%, respectively, of our marketable securities investments mature within one year and 12% and 67%, respectively, mature within one to four years. Our valuation techniques used to measure the fair values of our instruments that were classified as Level 1 in the table above were derived from quoted market prices and active markets for these instruments that exist. Our valuation techniques used to measure the fair values of Level 2 instruments listed in the table above, the counterparties to which have high credit ratings, were derived from the following: non-binding market consensus prices that were corroborated by observable market data, quoted market prices for similar instruments, or pricing models, such as discounted cash flow techniques, with all significant inputs derived from or corroborated by observable market data including LIBOR-based yield curves, among others.

Based on the trading prices of the $54.3 billion and $56.1 billion of senior notes and the related fair value hedges that we had outstanding as of August 31, 2019 and May 31, 2019, respectively, the estimated fair values of the senior notes and the related fair value hedges using Level 2 inputs at August 31, 2019 and May 31, 2019 were $59.8 billion and $58.4 billion, respectively.

 

 

12


Table of Contents

 

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

August 31, 2019

(Unaudited)

 

4.

INTANGIBLE ASSETS AND GOODWILL

The changes in intangible assets for fiscal 2020 and the net book value of intangible assets as of August 31, 2019 and May 31, 2019 were as follows:

 

 

 

Intangible Assets, Gross

 

 

Accumulated Amortization

 

 

Intangible Assets, Net

 

(in millions)

 

May 31,

2019

 

 

Additions &

Adjustments, net(1)

 

 

August 31,

2019

 

 

May 31,

2019

 

 

Expense

 

 

August 31,

2019

 

 

May 31,

2019

 

 

August 31,

2019

 

Developed technology

 

$

5,406

 

 

$

 

 

$

5,406

 

 

$

(3,467

)

 

$

(