10-Q 1 msft-10q_20180930.htm 10-Q msft-10q_20180930.htm

 

 

 

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 September 30, 2018

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: 001-37845

 

MICROSOFT CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Washington

 

91-1144442

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

One Microsoft Way, Redmond, Washington

 

98052-6399

(Address of principal executive offices)

 

(Zip Code)

(425) 882-8080

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of October 19, 2018

 

 

 

 

 

Common Stock, $0.00000625 par value per share

 

 

7,676,218,736 shares

 

 

 

 

 

 


 

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended September 30, 2018

INDEX

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

a)

Income Statements for the Three Months Ended September 30, 2018 and 2017

3

 

 

 

 

 

 

 

b)

Comprehensive Income Statements for the Three Months Ended September 30, 2018 and 2017

4

 

 

 

 

 

 

 

c)

Balance Sheets as of September 30, 2018 and June 30, 2018

5

 

 

 

 

 

 

 

d)

Cash Flows Statements for the Three Months Ended September 30, 2018 and 2017

6

 

 

 

 

 

 

 

e)

Stockholders’ Equity Statements for the Three Months Ended September 30, 2018 and 2017

7

 

 

 

 

 

 

 

f)

Notes to Financial Statements

8

 

 

 

 

 

 

 

g)

Report of Independent Registered Public Accounting Firm

31

 

 

 

 

 

 

Item 2.

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

32

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

46

 

 

 

 

 

 

Item 1A.

Risk Factors

46

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

 

 

 

 

Item 6.

Exhibits

58

 

 

 

 

 

SIGNATURE

59

 

 

 

2


PART I

Item 1

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INCOME STATEMENTS

 

(In millions, except per share amounts) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2018

 

 

2017

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

  17,299

 

 

$

14,298

 

Service and other

 

 

11,785

 

 

 

10,240

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

29,084

 

 

 

24,538

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

 

3,649

 

 

 

2,980

 

Service and other

 

 

6,256

 

 

 

5,298

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenue

 

 

9,905

 

 

 

8,278

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

19,179

 

 

 

16,260

 

Research and development

 

 

3,977

 

 

 

3,574

 

Sales and marketing

 

 

4,098

 

 

 

3,812

 

General and administrative

 

 

1,149

 

 

 

1,166

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

9,955

 

 

 

7,708

 

Other income, net

 

 

266

 

 

 

276

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

10,221

 

 

 

7,984

 

Provision for income taxes

 

 

1,397

 

 

 

1,408

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,824

 

 

$

6,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

1.15

 

 

$

0.85

 

Diluted

 

$

1.14

 

 

$

0.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

7,673

 

 

 

7,708

 

Diluted

 

 

7,766

 

 

 

7,799

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.46

 

 

$

0.42

 

 

 

 

Refer to accompanying notes.

 

 

3


PART I

Item 1

 

COMPREHENSIVE INCOME STATEMENTS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2018

 

 

2017

 

 

 

 

 

Net income

 

$

  8,824

 

 

$

  6,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Net change related to derivatives

 

 

(45

)

 

 

(106

)

Net change related to investments

 

 

(261

)

 

 

(288

)

Translation adjustments and other

 

 

(55

)

 

 

293

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

(361

)

 

 

(101

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

  8,463

 

 

$

  6,475

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes. Refer to Note 16 – Accumulated Other Comprehensive Income (Loss) for further information.

 

 

4


PART I

Item 1

 

BALANCE SHEETS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,
2018

 

 

June 30,
2018

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,137

 

 

$

11,946

 

Short-term investments

 

 

120,743

 

 

 

121,822

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

 

 

135,880

 

 

 

133,768

 

Accounts receivable, net of allowance for doubtful accounts of $319 and $377

 

 

17,390

 

 

 

26,481

 

Inventories

 

 

3,614

 

 

 

2,662

 

Other

 

 

7,311

 

 

 

6,751

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

164,195

 

 

 

169,662

 

Property and equipment, net of accumulated depreciation of $30,953 and $29,223

 

 

31,430

 

 

 

29,460

 

Operating lease right-of-use assets

 

 

6,734

 

 

 

6,686

 

Equity investments

 

 

2,034

 

 

 

1,862

 

Goodwill

 

 

35,855

 

 

 

35,683

 

Intangible assets, net

 

 

7,579

 

 

 

8,053

 

Other long-term assets

 

 

9,792

 

 

 

7,442

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

  257,619

 

 

$

258,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,511

 

 

$

8,617

 

Current portion of long-term debt

 

 

6,497

 

 

 

3,998

 

Accrued compensation

 

 

4,271

 

 

 

6,103

 

Short-term income taxes

 

 

2,341

 

 

 

2,121

 

Short-term unearned revenue

 

 

26,704

 

 

 

28,905

 

Other

 

 

7,953

 

 

 

8,744

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

56,277

 

 

 

58,488

 

Long-term debt

 

 

69,733

 

 

 

72,242

 

Long-term income taxes

 

 

28,936

 

 

 

30,265

 

Long-term unearned revenue

 

 

3,538

 

 

 

3,815

 

Deferred income taxes

 

 

1,977

 

 

 

541

 

Operating lease liabilities

 

 

5,652

 

 

 

5,568

 

Other long-term liabilities

 

 

5,539

 

 

 

5,211

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

171,652

 

 

 

176,130

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital – shares authorized 24,000; outstanding 7,680 and 7,677

 

 

71,303

 

 

 

71,223

 

Retained earnings

 

 

17,279

 

 

 

13,682

 

Accumulated other comprehensive loss

 

 

(2,615

)

 

 

(2,187

)

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

85,967

 

 

 

82,718

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

  257,619

 

 

$

258,848

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

5


PART I

Item 1

 

CASH FLOWS STATEMENTS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2018

 

 

2017

 

 

 

 

 

Operations

 

 

 

 

 

 

 

 

Net income

 

$

8,824

 

 

$

6,576

 

Adjustments to reconcile net income to net cash from operations:

 

 

 

 

 

 

 

 

Depreciation, amortization, and other

 

 

2,837

 

 

 

2,499

 

Stock-based compensation expense

 

 

1,107

 

 

 

973

 

Net recognized gains on investments and derivatives

 

 

(240

)

 

 

(523

)

Deferred income taxes

 

 

(247

)

 

 

(53

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

9,194

 

 

 

7,949

 

Inventories

 

 

(956

)

 

 

(1,023

)

Other current assets

 

 

(677

)

 

 

(318

)

Other long-term assets

 

 

21

 

 

 

(278

)

Accounts payable

 

 

(395

)

 

 

(407

)

Unearned revenue

 

 

(2,441

)

 

 

(1,806

)

Income taxes

 

 

(1,091

)

 

 

661

 

Other current liabilities

 

 

(2,322

)

 

 

(2,164

)

Other long-term liabilities

 

 

43

 

 

 

354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operations

 

 

13,657

 

 

 

12,440

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

 

Repayments of short-term debt, maturities of 90 days or less, net

 

 

0

 

 

 

(3,710

)

Proceeds from issuance of debt

 

 

0

 

 

 

3,954

 

Repayments of debt

 

 

0

 

 

 

(1,169

)

Common stock issued

 

 

360

 

 

 

307

 

Common stock repurchased

 

 

(3,744

)

 

 

(2,570

)

Common stock cash dividends paid

 

 

(3,220

)

 

 

(3,003

)

Other, net

 

 

(780

)

 

 

(150

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in financing

 

 

(7,384

)

 

 

(6,341

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(3,602

)

 

 

(2,132

)

Acquisition of companies, net of cash acquired, and purchases of intangible and other assets

 

 

(245

)

 

 

(179

)

Purchases of investments

 

 

(19,551

)

 

 

(32,961

)

Maturities of investments

 

 

5,214

 

 

 

5,226

 

Sales of investments

 

 

15,231

 

 

 

23,036

 

Securities lending payable

 

 

0

 

 

 

106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing

 

 

(2,953

)

 

 

(6,904

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

 

 

(129

)

 

 

26

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

3,191

 

 

 

(779

)

Cash and cash equivalents, beginning of period

 

 

11,946

 

 

 

7,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

15,137

 

 

$

6,884

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

6


PART I

Item 1

 

STOCKHOLDERS’ EQUITY STATEMENTS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2018

 

 

2017

 

 

 

 

 

Common stock and paid-in capital

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

71,223

 

 

$

69,315

 

Common stock issued

 

 

360

 

 

 

307

 

Common stock repurchased

 

 

(1,387

)

 

 

(1,175

)

Stock-based compensation expense

 

 

1,107

 

 

 

973

 

Other, net

 

 

0

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

71,303

 

 

 

69,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

13,682

 

 

 

17,769

 

Net income

 

 

8,824

 

 

 

6,576

 

Common stock cash dividends

 

 

(3,528

)

 

 

(3,239

)

Common stock repurchased

 

 

(2,376

)

 

 

(1,404

)

Cumulative effect of accounting changes

 

 

677

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

17,279

 

 

 

19,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

(2,187

)

 

 

627

 

Other comprehensive loss

 

 

(361

)

 

 

(101

)

Cumulative effect of accounting changes

 

 

(67

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

(2,615

)

 

 

526

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

$

85,967

 

 

$

  89,647

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

 

7


PART I

Item 1

 

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

Our unaudited interim consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America (“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 fiscal year 2018 Form 10-K filed with the U.S. Securities and Exchange Commission on August 3, 2018.

We have recast certain prior period amounts related to investments, derivatives, and fair value measurements to conform to the current period presentation based on our adoption of the new accounting standard for financial instruments. We have also recast prior period commercial cloud revenue to include the commercial portion of LinkedIn to provide a comparable view of our commercial cloud business performance. The commercial portion of LinkedIn includes LinkedIn Recruiter, Sales Navigator, premium business subscriptions, and other services for organizations. The recast of these prior period amounts had no impact on our consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated.

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 and assumptions include: for revenue recognition, determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, variable consideration, and other obligations such as product returns and refunds; 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; the market value of, and demand for, our inventory; stock-based compensation forfeiture rates; 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 the timing and amount of impairments for investments. Actual results and outcomes may differ from management’s estimates and assumptions.

 

Financial Instruments

Investments

We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash equivalents. The fair values of these investments approximate their carrying values. In general, investments with original maturities of greater than three months and remaining maturities of less than one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term based on their highly liquid nature and because such marketable securities represent the investment of cash that is available for current operations.

8


PART I

Item 1

 

Debt investments are classified as available-for-sale and realized gains and losses are recorded using the specific identification method. Changes in fair value, excluding other-than-temporary impairments, are recorded in other comprehensive income (“OCI”). Debt investments are impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. We employ a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair value is less than cost. We also evaluate whether we have plans to sell the security or it is more likely than not that we will be required to sell the security before recovery. In addition, we consider specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in other income (expense), net and a new cost basis in the investment is established.

Equity investments with readily determinable fair values are measured at fair value. Equity investments without readily determinable fair values are measured using the equity method, or measured at cost with adjustments for observable changes in price or impairments (referred to as the measurement alternative). We perform a qualitative assessment on a quarterly basis and recognize an impairment if there are sufficient indicators that the fair value of the investment is less than carrying value. Changes in value are recorded in other income (expense), net.

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. Cash received is recorded as an asset with a corresponding liability.

Derivatives

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, gains and losses are recognized in other income (expense), net with offsetting gains and losses on the hedged items. For options designated as fair value hedges, changes in the time value are excluded from the assessment of hedge effectiveness and recognized in other income (expense), net.

For derivative instruments designated as cash flow hedges, the effective portion of the gains and losses are initially reported as a component of OCI and subsequently recognized in revenue when the hedged exposure is recognized in revenue. Gains and losses on derivatives representing either hedge components excluded from the assessment of effectiveness or hedge ineffectiveness are recognized in other income (expense), net.

For derivative instruments that are not designated as hedges, gains and losses from changes in fair values are primarily recognized in other income (expense), net.

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 investments primarily include U.S. government securities, common and preferred stock, and mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.

9


PART I

Item 1

 

 

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. Our Level 2 investments primarily include corporate notes and bonds, foreign government bonds, mortgage- and asset-backed securities, commercial paper, certificates of deposit, and U.S. agency securities. 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 assets and liabilities primarily include investments in corporate notes and bonds, 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 equity investments without readily determinable fair values on a nonrecurring basis. 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.  

Our other current financial assets and current financial liabilities have fair values that approximate their carrying values.

Contract Balances  

As of September 30, 2018 and June 30, 2018, long-term accounts receivable, net of allowance for doubtful accounts, were $1.8 billion and $1.8 billion, respectively, and are included in other long-term assets on our consolidated balance sheets.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

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. We adopted the guidance effective July 1, 2018. Adoption of the guidance was applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We recorded a net cumulative-effect adjustment that resulted in an increase in retained earnings of $557 million, which reversed the previous deferral of income tax consequences and recorded new deferred tax assets from intra-entity transfers involving assets other than inventory, partially offset by a U.S. deferred tax liability related to global intangible low-taxed income (“GILTI”). Adoption of the standard resulted in an increase in long-term deferred tax assets of $2.8 billion, an increase in long-term deferred tax liabilities of $2.1 billion, and a reduction in other current assets of $152 million. As a result of the Tax Cuts and Jobs Act (“TCJA”), we are continuing to evaluate the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems. Adoption of the standard had no impact to cash from or used in operating, financing, or investing on our consolidated cash flows statements.

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 OCI.

10


PART I

Item 1

 

We adopted the standard effective July 1, 2018. Adoption of the standard was applied using a modified retrospective approach through a cumulative-effect adjustment from accumulated other comprehensive income (“AOCI”) to retained earnings as of the effective date, and we elected to measure equity investments without readily determinable fair values at cost with adjustments for observable changes in price or impairments. The cumulative-effect adjustment included any previously held unrealized gains and losses held in AOCI related to our equity investments carried at fair value as well as the impact of recording the fair value of certain equity investments carried at cost. The impact on our consolidated balance sheets upon adoption was not material. Adoption of the standard had no impact to cash from or used in operating, financing, or investing on our consolidated cash flows statements.

Recent Accounting Guidance Not Yet Adopted

Financial Instruments – Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued new guidance related to accounting for hedging activities. This guidance expands strategies that qualify for hedge accounting, changes how many hedging relationships are presented in the financial statements, and simplifies the application of hedge accounting in certain situations. The standard will be effective for us beginning July 1, 2019, with early adoption permitted for any interim or annual period before the effective date. 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.

Financial Instruments – Credit Losses

In June 2016, the FASB issued a new standard to replace the incurred loss impairment methodology under current 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 to align our credit loss methodology with the new standard. We are currently evaluating the impact of this standard on our consolidated financial statements, including accounting policies, processes, and systems.

 

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 per share amounts)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Net income available for common shareholders (A)

 

$

8,824

 

 

$

6,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock (B)

 

 

7,673

 

 

 

7,708

 

Dilutive effect of stock-based awards

 

 

93

 

 

 

91

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents (C)

 

 

7,766

 

 

 

7,799

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

 

$

1.15

 

 

$

0.85

 

Diluted (A/C)

 

$

1.14

 

 

$

0.84

 

 

 

 

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.

 

11


PART I

Item 1

 

NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

Interest and dividends income

 

$

681

 

 

$

473

 

Interest expense

 

 

  (674

)

 

 

  (672

)

Net recognized gains on investments

 

 

243

 

 

 

573

 

Net losses on derivatives

 

 

(3

)

 

 

(50

)

Net gains (losses) on foreign currency remeasurements

 

 

5

 

 

 

(9

)

Other, net

 

 

14

 

 

 

(39

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

266

 

 

$

276

 

 

 

 

 

 

 

 

 

 

 

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

Realized gains from sales of available-for-sale securities

 

$

  7

 

 

$

  13

 

Realized losses from sales of available-for-sale securities

 

 

(85

)

 

 

(80

)

Other-than-temporary impairments of investments

 

 

0

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

(78

)

 

$

(68

)

 

 

 

 

 

 

 

 

 

 

Net recognized gains (losses) on equity investments were as follows:

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

Net realized gains on investments sold

 

$

203

 

 

$

646

 

Net unrealized gains on investments still held

 

 

118

 

 

 

0

 

Other-than-temporary impairments of investments

 

 

0

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

321

 

 

$

641

 

 

 

 

 

 

 

 

 

 

 

12


PART I

Item 1

 

NOTE 4  INVESTMENTS

Investment Components

The components of investments were as follows:

 

(In millions)

 

Fair Value Level

 

Cost Basis

 

Unrealized

Gains

 

Unrealized

Losses

 

Recorded Basis

 

Cash and Cash

Equivalents

 

Short-term

Investments

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Level 2

 

$

2,883

 

$

0

 

$

0

 

$

2,883

 

$

2,784

 

$

99

 

$

0

 

Certificates of deposit

 

Level 2

 

 

2,537

 

 

0

 

 

0

 

 

2,537

 

 

2,081

 

 

456

 

 

0

 

U.S. government securities

 

Level 1

 

 

111,281

 

 

9

 

 

(1,442

)

 

109,848

 

 

4,419

 

 

105,429

 

 

0

 

U.S. agency securities

 

Level 2

 

 

639

 

 

0

 

 

0

 

 

639

 

 

349

 

 

290

 

 

0

 

Foreign government bonds

 

Level 2

 

 

4,981

 

 

1

 

 

(12

)

 

4,970

 

 

1,384

 

 

3,586

 

 

0

 

Mortgage- and asset-backed securities

 

Level 2

 

 

3,358

 

 

4

 

 

(14

)

 

3,348

 

 

0

 

 

3,348

 

 

0

 

Corporate notes and bonds

 

Level 2

 

 

7,143

 

 

22

 

 

(53

)

 

7,112

 

 

0

 

 

7,112

 

 

0

 

Corporate notes and bonds

 

Level 3

 

 

15

 

 

0  

 

 

0

 

 

15

 

 

0

 

 

15

 

 

0

 

Municipal securities

 

Level 2

 

 

268

 

 

32

 

 

(1

)

 

299

 

 

0

 

 

299

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

$

133,105

 

$

68

 

$

(1,522

)

$

131,651

 

$

11,017

 

$

120,634

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

Level 1

 

 

 

 

 

 

 

 

 

 

$

562

 

$

239

 

$

0

 

$

323

 

Equity investments

 

Other

 

 

 

 

 

 

 

 

 

 

 

1,711

 

 

0

 

 

0

 

 

1,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

$

2,273

 

$

239

 

$

0

 

$

2,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

$

3,881

 

$

3,881

 

$

0

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

109

 

 

0

 

 

109

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

$

137,914

 

$

15,137

 

$

120,743

 

$

2,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

 

13


PART I

Item 1

 

(In millions)

 

Fair Value Level

 

Cost Basis

 

Unrealized

Gains

 

Unrealized

Losses

 

Recorded Basis

 

Cash and Cash

Equivalents

 

Short-term

Investments

 

Equity

Investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Level 2

 

$

2,513

 

$

0

 

$

0

 

$

2,513

 

$

2,215

 

$

298

 

$

0

 

Certificates of deposit

 

Level 2

 

 

2,058

 

 

0

 

 

0

 

 

2,058

 

 

1,865

 

 

193

 

 

0

 

U.S. government securities

 

Level 1

 

 

108,120

 

 

62

 

 

(1,167

)

 

107,015

 

 

2,280

 

 

104,735

 

 

0

 

U.S. agency securities

 

Level 2

 

 

1,742

 

 

0

 

 

0

 

 

1,742

 

 

1,398

 

 

344

 

 

0

 

Foreign government bonds

 

Level 1

 

 

22

 

 

0

 

 

0

 

 

22

 

 

0

 

 

22

 

 

0

 

Foreign government bonds

 

Level 2

 

 

5,063

 

 

1

 

 

(10

)

 

5,054

 

 

0

 

 

5,054

 

 

0

 

Mortgage- and asset-backed securities

 

Level 2

 

 

3,864

 

 

4

 

 

(13

)

 

3,855

 

 

0

 

 

3,855

 

 

0

 

Corporate notes and bonds

 

Level 2

 

 

6,929

 

 

21

 

 

(56

)

 

6,894

 

 

0

 

 

6,894

 

 

0

 

Corporate notes and bonds

 

Level 3

 

 

15

 

 

0

 

 

0

 

 

15

 

 

0

 

 

15

 

 

0

 

Municipal securities

 

Level 2

 

 

271

 

 

37