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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 September 30, 2020

 

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

 

 

Washington

 

91-1144442

(State of incorporation)

 

(I.R.S. ID)

 

ONE MICROSOFT WAY, REDMOND, washington 98052-6399

(425) 882-8080

www.microsoft.com/investor

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Title of each class

 

Trading Symbol

 

Name of exchange on which registered

 

 

 

 

 

Common stock, $0.00000625 par value per share

 

MSFT

 

NASDAQ

2.125% Notes due 2021

 

MSFT

 

NASDAQ

3.125% Notes due 2028

 

MSFT

 

NASDAQ

2.625% Notes due 2033

 

MSFT

 

NASDAQ

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

NONE

 

 

 

 

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 22, 2020

 

 

 

 

 

Common Stock, $0.00000625 par value per share

 

 

7,560,495,969 shares

 

 

 

 

 

 


 

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended September 30, 2020

INDEX

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

a)

Income Statements for the Three Months Ended September 30, 2020 and 2019

3

 

 

 

 

 

 

 

b)

Comprehensive Income Statements for the Three Months Ended September 30, 2020 and 2019

4

 

 

 

 

 

 

 

c)

Balance Sheets as of September 30, 2020 and June 30, 2020

5

 

 

 

 

 

 

 

d)

Cash Flows Statements for the Three Months Ended September 30, 2020 and 2019

6

 

 

 

 

 

 

 

e)

Stockholders’ Equity Statements for the Three Months Ended September 30, 2020 and 2019

7

 

 

 

 

 

 

 

f)

Notes to Financial Statements

8

 

 

 

 

 

 

 

g)

Report of Independent Registered Public Accounting Firm

28

 

 

 

 

 

 

Item 2.

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

29

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

 

 

 

 

 

 

Item 4.

Controls and Procedures

42

 

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

43

 

 

 

 

 

 

Item 1A.

Risk Factors

43

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

 

 

 

 

Item 6.

Exhibits

57

 

 

 

 

 

SIGNATURE

58

 

 

 

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,

 

2020

 

 

2019

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

15,803

 

 

$

15,768

 

Service and other

 

 

21,351

 

 

 

17,287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

37,154

 

 

 

33,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

 

3,597

 

 

 

3,305

 

Service and other

 

 

7,405

 

 

 

7,101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenue

 

 

11,002

 

 

 

10,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

26,152

 

 

 

22,649

 

Research and development

 

 

4,926

 

 

 

4,565

 

Sales and marketing

 

 

4,231

 

 

 

4,337

 

General and administrative

 

 

1,119

 

 

 

1,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

15,876

 

 

 

12,686

 

Other income, net

 

 

248

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

16,124

 

 

 

12,686

 

Provision for income taxes

 

 

2,231

 

 

 

2,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,893

 

 

$

10,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

1.84

 

 

$

1.40

 

Diluted

 

$

1.82

 

 

$

1.38

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

7,566

 

 

 

7,634

 

Diluted

 

 

7,637

 

 

 

7,710

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

3


PART I

Item 1

 

COMPREHENSIVE INCOME STATEMENTS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2020

 

 

2019

 

 

 

 

 

Net income

 

$

13,893

 

 

$

10,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Net change related to derivatives

 

 

4

 

 

 

(2

)

Net change related to investments

 

 

(201

)

 

 

577

 

Translation adjustments and other

 

 

111

 

 

 

(296

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

(86

)

 

 

279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

13,807

 

 

$

10,957

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

4


PART I

Item 1

 

BALANCE SHEETS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,
2020

 

 

June 30,
2020

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,205

 

 

$

13,576

 

Short-term investments

 

 

120,772

 

 

 

122,951

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

 

 

137,977

 

 

 

136,527

 

Accounts receivable, net of allowance for doubtful accounts of $610 and $788

 

 

22,851

 

 

 

32,011

 

Inventories

 

 

2,705

 

 

 

1,895

 

Other current assets

 

 

13,544

 

 

 

11,482

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

177,077

 

 

 

181,915

 

Property and equipment, net of accumulated depreciation of $45,417 and $43,197

 

 

47,927

 

 

 

44,151

 

Operating lease right-of-use assets

 

 

9,047

 

 

 

8,753

 

Equity investments

 

 

3,103

 

 

 

2,965

 

Goodwill

 

 

43,890

 

 

 

43,351

 

Intangible assets, net

 

 

6,923

 

 

 

7,038

 

Other long-term assets

 

 

13,034

 

 

 

13,138

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

301,001

 

 

$

301,311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,509

 

 

$

12,530

 

Current portion of long-term debt

 

 

6,497

 

 

 

3,749

 

Accrued compensation

 

 

5,714

 

 

 

7,874

 

Short-term income taxes

 

 

2,384

 

 

 

2,130

 

Short-term unearned revenue

 

 

33,476

 

 

 

36,000

 

Other current liabilities

 

 

9,476

 

 

 

10,027

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

70,056

 

 

 

72,310

 

Long-term debt

 

 

57,055

 

 

 

59,578

 

Long-term income taxes

 

 

28,204

 

 

 

29,432

 

Long-term unearned revenue

 

 

2,829

 

 

 

3,180

 

Deferred income taxes

 

 

187

 

 

 

204

 

Operating lease liabilities

 

 

7,753

 

 

 

7,671

 

Other long-term liabilities

 

 

11,525

 

 

 

10,632

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

177,609

 

 

 

183,007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital – shares authorized 24,000; outstanding 7,564 and 7,571

 

 

81,089

 

 

 

80,552

 

Retained earnings

 

 

39,193

 

 

 

34,566

 

Accumulated other comprehensive income

 

 

3,110

 

 

 

3,186

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

123,392

 

 

 

118,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

301,001

 

 

$

301,311

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

5


PART I

Item 1

 

CASH FLOWS STATEMENTS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2020

 

 

2019

 

 

 

 

Operations

 

 

 

 

 

 

 

 

Net income

 

$

13,893

 

 

$

10,678

 

Adjustments to reconcile net income to net cash from operations:

 

 

 

 

 

 

 

 

Depreciation, amortization, and other

 

 

2,645

 

 

 

2,971

 

Stock-based compensation expense

 

 

1,456

 

 

 

1,262

 

Net recognized losses (gains) on investments and derivatives

 

 

(128

)

 

 

11

 

Deferred income taxes

 

 

(11

)

 

 

(177

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

8,843

 

 

 

10,090

 

Inventories

 

 

(808

)

 

 

(561

)

Other current assets

 

 

(54

)

 

 

(438

)

Other long-term assets

 

 

(62

)

 

 

(333

)

Accounts payable

 

 

315

 

 

 

(547

)

Unearned revenue

 

 

(3,064

)

 

 

(2,892

)

Income taxes

 

 

(983

)

 

 

(3,336

)

Other current liabilities

 

 

(2,951

)

 

 

(3,320

)

Other long-term liabilities

 

 

244

 

 

 

410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operations

 

 

19,335

 

 

 

13,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

 

Repayments of debt

 

 

0

 

 

 

(2,500

)

Common stock issued

 

 

545

 

 

 

427

 

Common stock repurchased

 

 

(6,743

)

 

 

(4,912

)

Common stock cash dividends paid

 

 

(3,856

)

 

 

(3,510

)

Other, net

 

 

(235

)

 

 

286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in financing

 

 

(10,289

)

 

 

(10,209

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(4,907

)

 

 

(3,385

)

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

 

 

(481

)

 

 

(462

)

Purchases of investments

 

 

(14,580

)

 

 

(23,390

)

Maturities of investments

 

 

14,266

 

 

 

19,082

 

Sales of investments

 

 

2,414

 

 

 

6,379

 

Other, net

 

 

(2,083

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing

 

 

(5,371

)

 

 

(1,776

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

 

 

(46

)

 

 

(72

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

3,629

 

 

 

1,761

 

Cash and cash equivalents, beginning of period

 

 

13,576

 

 

 

11,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

17,205

 

 

$

13,117

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

6


PART I

Item 1

 

STOCKHOLDERS’ EQUITY STATEMENTS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2020

 

 

2019

 

 

 

 

 

 

 

Common stock and paid-in capital

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

80,552

 

 

$

78,520

 

 

Common stock issued

 

 

815

 

 

 

427

 

 

Common stock repurchased

 

 

(1,732

)

 

 

(1,326

)

 

Stock-based compensation expense

 

 

1,456

 

 

 

1,262

 

 

Other, net

 

 

(2

)

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

81,089

 

 

 

78,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

34,566

 

 

 

24,150

 

 

Net income

 

 

13,893

 

 

 

10,678

 

 

Common stock cash dividends

 

 

(4,231

)

 

 

(3,887

)

 

Common stock repurchased

 

 

(5,003

)

 

 

(3,701

)

 

Cumulative effect of accounting changes

 

 

(32

)

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

39,193

 

 

 

27,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

3,186

 

 

 

(340

)

 

Other comprehensive income (loss)

 

 

(86

)

 

 

279

 

 

Cumulative effect of accounting changes

 

 

10

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

3,110

 

 

 

(61

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

$

123,392

 

 

$

106,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.56

 

 

$

0.51

 

 

 

 

 

 

 

 

 

 

 

 

 

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 2020 Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on July 30, 2020.

 

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 (“SSP”) 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 uncertain tax positions that have been recognized in 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 due to risks and uncertainties, including uncertainty in the current economic environment due to the recent outbreak of a novel strain of the coronavirus (“COVID-19”).

In July 2020, we completed an assessment of the useful lives of our server and network equipment and determined we should increase the estimated useful life of server equipment from three years to four years and increase the estimated useful life of network equipment from two years to four years. This change in accounting estimate was effective beginning fiscal year 2021. Based on the carrying amount of server and network equipment included in property and equipment, net as of June 30, 2020, the effect of this change in estimate for the three months ended September 30, 2020, was an increase in operating income of $927 million and net income of $763 million, or $0.10 per both basic and diluted share.

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 credit losses and impairments, are recorded in other comprehensive income. Fair value is calculated based on publicly available market information or other estimates determined by management. 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 extent to which the fair value is less than cost. To determine credit losses, we employ a systematic methodology that considers available quantitative and qualitative evidence. In addition, we consider specific adverse conditions related to the financial health of, and business outlook for, the investee. If 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, then a decline in fair value below cost is recorded as an impairment charge in other income (expense), net and a new cost basis in the investment is established. If market, industry, and/or investee conditions deteriorate, we may incur future impairments.

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 periodic 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.

Derivatives

Derivative instruments are recognized as either assets or liabilities and 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. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in other income (expense), net.

For derivative instruments designated as cash flow hedges, gains and losses are initially reported as a component of other comprehensive income and subsequently recognized in earnings with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness are recognized in earnings.

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 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.

 

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 include commercial paper, certificates of deposit, U.S. agency securities, foreign government bonds, mortgage- and asset-backed securities, corporate notes and bonds, and municipal securities. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.

9


PART I

Item 1

 

 

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 include investments in corporate notes and bonds, municipal securities, 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 and Other Receivables

As of September 30, 2020 and June 30, 2020, other receivables due from suppliers were $1.1 billion and $442 million, respectively, and are included in accounts receivable, net in our consolidated balance sheets.

As of both September 30, 2020 and June 30, 2020, long-term accounts receivable, net of allowance for doubtful accounts was $2.7 billion and is included in other long-term assets in our consolidated balance sheets.

 

We record financing receivables when we offer certain of our customers the option to acquire our software products and services offerings through a financing program in a limited number of countries. As of September 30, 2020 and June 30, 2020, financing receivables, net were $4.8 billion and $5.2 billion, respectively, for short-term and long-term financing receivables, which are included in other current assets and other long-term assets in our consolidated balance sheets. We record an allowance to cover expected losses based on troubled accounts, historical experience, and other currently available evidence.

 

Recent Accounting Guidance

Recently Adopted Accounting Guidance

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 adopted the standard effective July 1, 2020. We use a forward-looking expected credit loss model for accounts receivable, loans, and other financial instruments. Credit losses relating to available-for-sale debt securities are recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. We applied 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. The adoption of the standard did not have a material impact on our consolidated financial statements.

Recent Accounting Guidance Not Yet Adopted

Accounting for Income Taxes

In December 2019, the FASB issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for us beginning July 1, 2021, with early adoption permitted. We are currently evaluating the impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.

 

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 September 30,

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Net income available for common shareholders (A)

 

$

13,893

 

 

$

10,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock (B)

 

 

7,566

 

 

 

7,634

 

Dilutive effect of stock-based awards

 

 

71

 

 

 

76

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents (C)

 

 

7,637

 

 

 

7,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

 

$

1.84

 

 

$

1.40

 

Diluted (A/C)

 

$

1.82

 

 

$

1.38

 

 

 

 

 

 

 

 

 

 

 

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

 

NOTE 3 — OTHER INCOME (EXPENSE), NET

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

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Interest and dividends income

 

$

570

 

 

$

724

 

Interest expense

 

 

(589

)

 

 

(637

)

Net recognized gains (losses) on investments

 

 

125

 

 

 

(57

)

Net gains on derivatives

 

 

3

 

 

 

46

 

Net gains (losses) on foreign currency remeasurements

 

 

139

 

 

 

(58

)

Other, net

 

 

0

 

 

 

(18

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

248

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

Net Recognized Gains (Losses) on Investments

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

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Realized gains from sales of available-for-sale securities

 

$

19

 

 

$

    7

 

Realized losses from sales of available-for-sale securities

 

 

(5

)

 

 

(4

)

Impairments and allowance for credit losses

 

 

3

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

17

 

 

$

(1

)

 

 

 

 

 

 

 

 

 

 

11


PART I

Item 1

 

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

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

2020

 

 

 

2019

 

 

 

 

 

 

 

 

 

 

Net realized gains on investments sold

 

$

17

 

 

$

22

 

Net unrealized gains (losses) on investments still held

 

 

100

 

 

 

(56

)

Impairments of investments

 

 

(9

)

 

 

(22

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

108

 

 

$

(56

)

 

 

 

 

 

 

 

 

 

 

NOTE 4 — INVESTMENTS

Investment Components

The components of investments were as follows:

 

(In millions)

 

Fair Value
Level

 

 

 

Adjusted

Cost Basis

 

 

 

Unrealized

Gains

 

 

 

Unrealized

Losses

 

 

 

Recorded

Basis

 

 

 

Cash

 and Cash

Equivalents

 

 

 

Short-term

Investments

 

 

 

Equity

Investments