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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, 2021

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

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 21, 2021

 

 

 

 

 

Common Stock, $0.00000625 par value per share

 

 

7,507,980,444 shares

 

 

 

 

 


 

 

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended September 30, 2021

INDEX

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

a)

Income Statements for the Three Months Ended September 30, 2021 and 2020

3

 

 

 

 

 

 

 

b)

Comprehensive Income Statements for the Three Months Ended September 30, 2021 and 2020

4

 

 

 

 

 

 

 

c)

Balance Sheets as of September 30, 2021 and June 30, 2021

5

 

 

 

 

 

 

 

d)

Cash Flows Statements for the Three Months Ended September 30, 2021 and 2020

6

 

 

 

 

 

 

 

e)

Stockholders’ Equity Statements for the Three Months Ended September 30, 2021 and 2020

7

 

 

 

 

 

 

 

f)

Notes to Financial Statements

8

 

 

 

 

 

 

 

g)

Report of Independent Registered Public Accounting Firm

30

 

 

 

 

 

 

Item 2.

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

31

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

46

 

 

 

 

 

 

Item 4.

Controls and Procedures

46

 

 

 

 

 

PART II. 

OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

47

 

 

 

 

 

 

Item 1A.

Risk Factors

47

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

 

 

 

 

 

 

Item 6.

Exhibits

62

 

 

 

 

 

SIGNATURE

63

 

 

 

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,

 

2021

 

 

2020

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

Product

 

$

16,631

 

 

$

15,803

 

Service and other

 

 

28,686

 

 

 

21,351

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

 

45,317

 

 

 

37,154

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

 

Product

 

 

3,792

 

 

 

3,597

 

Service and other

 

 

9,854

 

 

 

7,405

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of revenue

 

 

13,646

 

 

 

11,002

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

31,671

 

 

 

26,152

 

Research and development

 

 

5,599

 

 

 

4,926

 

Sales and marketing

 

 

4,547

 

 

 

4,231

 

General and administrative

 

 

1,287

 

 

 

1,119

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

20,238

 

 

 

15,876

 

Other income, net

 

 

286

 

 

 

248

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

20,524

 

 

 

16,124

 

Provision for income taxes

 

 

19

 

 

 

2,231

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

20,505

 

 

$

13,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

2.73

 

 

$

1.84

 

Diluted

 

$

2.71

 

 

$

1.82

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

7,513

 

 

 

7,566

 

Diluted

 

 

7,567

 

 

 

7,637

 

 

 

 

Refer to accompanying notes.

3


PART I

Item 1

 

COMPREHENSIVE INCOME STATEMENTS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2021

 

 

2020

 

 

 

 

 

Net income

 

$

20,505

 

 

$

13,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Net change related to derivatives

 

 

2

 

 

 

4

 

Net change related to investments

 

 

(422

)

 

 

(201

)

Translation adjustments and other

 

 

(119

)

 

 

111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

(539

)

 

 

(86

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

19,966

 

 

$

13,807

 

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

4


PART I

Item 1

 

BALANCE SHEETS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,
2021

 

 

June 30,
2021

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,165

 

 

$

14,224

 

Short-term investments

 

 

111,450

 

 

 

116,110

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

 

 

130,615

 

 

 

130,334

 

Accounts receivable, net of allowance for doubtful accounts of $536 and $751

 

 

27,349

 

 

 

38,043

 

Inventories

 

 

3,411

 

 

 

2,636

 

Other current assets

 

 

12,951

 

 

 

13,393

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

174,326

 

 

 

184,406

 

Property and equipment, net of accumulated depreciation of $52,469 and $51,351

 

 

63,772

 

 

 

59,715

 

Operating lease right-of-use assets

 

 

11,575

 

 

 

11,088

 

Equity investments

 

 

6,393

 

 

 

5,984

 

Goodwill

 

 

50,455

 

 

 

49,711

 

Intangible assets, net

 

 

7,794

 

 

 

7,800

 

Other long-term assets

 

 

21,103

 

 

 

15,075

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

335,418

 

 

$

333,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,832

 

 

$

15,163

 

Current portion of long-term debt

 

 

3,249

 

 

 

8,072

 

Accrued compensation

 

 

6,894

 

 

 

10,057

 

Short-term income taxes

 

 

6,272

 

 

 

2,174

 

Short-term unearned revenue

 

 

38,465

 

 

 

41,525

 

Other current liabilities

 

 

10,816

 

 

 

11,666

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

80,528

 

 

 

88,657

 

Long-term debt

 

 

50,039

 

 

 

50,074

 

Long-term income taxes

 

 

25,715

 

 

 

27,190

 

Long-term unearned revenue

 

 

2,550

 

 

 

2,616

 

Deferred income taxes

 

 

212

 

 

 

198

 

Operating lease liabilities

 

 

10,050

 

 

 

9,629

 

Other long-term liabilities

 

 

14,346

 

 

 

13,427

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

183,440

 

 

 

191,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock and paid-in capital – shares authorized 24,000; outstanding 7,510 and 7,519

 

 

83,751

 

 

 

83,111

 

Retained earnings

 

 

66,944

 

 

 

57,055

 

Accumulated other comprehensive income

 

 

1,283

 

 

 

1,822

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

151,978

 

 

 

141,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

335,418

 

 

$

333,779

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

5


PART I

Item 1

 

 

CASH FLOWS STATEMENTS

 

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2021

 

 

2020

 

 

 

 

Operations

 

 

 

 

 

 

 

 

Net income

 

$

20,505

 

 

$

13,893

 

Adjustments to reconcile net income to net cash from operations:

 

 

 

 

 

 

 

 

Depreciation, amortization, and other

 

 

3,212

 

 

 

2,645

 

Stock-based compensation expense

 

 

1,702

 

 

 

1,456

 

Net recognized gains on investments and derivatives

 

 

(364

)

 

 

(128

)

Deferred income taxes

 

 

(5,970

)

 

 

(11

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

10,486

 

 

 

8,843

 

Inventories

 

 

(777

)

 

 

(808

)

Other current assets

 

 

940

 

 

 

(54

)

Other long-term assets

 

 

(598

)

 

 

(62

)

Accounts payable

 

 

(471

)

 

 

315

 

Unearned revenue

 

 

(2,885

)

 

 

(3,064

)

Income taxes

 

 

2,653

 

 

 

(983

)

Other current liabilities

 

 

(4,143

)

 

 

(2,951

)

Other long-term liabilities

 

 

250

 

 

 

244

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash from operations

 

 

24,540

 

 

 

19,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

 

Repayments of debt

 

 

(4,826

)

 

 

0

 

Common stock issued

 

 

612

 

 

 

545

 

Common stock repurchased

 

 

(7,684

)

 

 

(6,743

)

Common stock cash dividends paid

 

 

(4,206

)

 

 

(3,856

)

Other, net

 

 

(172

)

 

 

(235

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in financing

 

 

(16,276

)

 

 

(10,289

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing

 

 

 

 

 

 

 

 

Additions to property and equipment

 

 

(5,810

)

 

 

(4,907

)

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

 

 

(1,206

)

 

 

(481

)

Purchases of investments

 

 

(10,309

)

 

 

(14,580

)

Maturities of investments

 

 

8,862

 

 

 

14,266

 

Sales of investments

 

 

5,630

 

 

 

2,414

 

Other, net

 

 

(417

)

 

 

(2,083

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing

 

 

(3,250

)

 

 

(5,371

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rates on cash and cash equivalents

 

 

(73

)

 

 

(46

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

4,941

 

 

 

3,629

 

Cash and cash equivalents, beginning of period

 

 

14,224

 

 

 

13,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

19,165

 

 

$

17,205

 

 

 

 

 

 

 

 

 

 

 

Refer to accompanying notes.

 

6


PART I

Item 1

 

 

STOCKHOLDERS’ EQUITY STATEMENTS

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2021

 

 

2020

 

 

 

 

 

Common stock and paid-in capital

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

83,111

 

 

$

80,552

 

Common stock issued

 

 

612

 

 

 

815

 

Common stock repurchased

 

 

(1,677

)

 

 

(1,732

)

Stock-based compensation expense

 

 

1,702

 

 

 

1,456

 

Other, net

 

 

3

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

83,751

 

 

 

81,089

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

57,055

 

 

 

34,566

 

Net income

 

 

20,505

 

 

 

13,893

 

Common stock cash dividends

 

 

(4,651

)

 

 

(4,231

)

Common stock repurchased

 

 

(5,965

)

 

 

(5,003

)

Cumulative effect of accounting changes

 

 

0

 

 

 

(32

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

66,944

 

 

 

39,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income

 

 

 

 

 

 

 

 

Balance, beginning of period

 

 

1,822

 

 

 

3,186

 

Other comprehensive loss

 

 

(539

)

 

 

(86

)

Cumulative effect of accounting changes

 

 

0

 

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 

1,283

 

 

 

3,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

$

151,978

 

 

$

123,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.62

 

 

$

0.56

 

 

 

 

 

 

 

 

 

 

 

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 2021 Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on July 29, 2021.

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 COVID-19.

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.

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.

8


PART I

Item 1

 

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 other income (expense), net with the corresponding hedged item. Gains and losses representing hedge components excluded from the assessment of effectiveness 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 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 include certain over-the-counter forward, 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 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.

9


PART I

Item 1

 

Contract Balances and Other Receivables

As of September 30, 2021 and June 30, 2021, other receivables due from suppliers were $854 million and $965 million, respectively, and are included in accounts receivable, net in our consolidated balance sheets.

As of both September 30, 2021 and June 30, 2021, long-term accounts receivable, net of allowance for doubtful accounts, was $3.4 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, 2021 and June 30, 2021, our financing receivables, net were $3.8 billion and $4.4 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

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. We adopted the standard effective July 1, 2021. Adoption of the standard did not have a material impact on our consolidated financial statements.

 

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,

 

2021

 

 

2020

 

 

 

 

Net income available for common shareholders (A)

 

$

  20,505

 

 

$

  13,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average outstanding shares of common stock (B)

 

 

7,513

 

 

 

7,566

 

Dilutive effect of stock-based awards

 

 

54

 

 

 

71

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents (C)

 

 

7,567

 

 

 

  7,637

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (A/B)

 

$

2.73

 

 

$

1.84

 

Diluted (A/C)

 

$

2.71

 

 

$

1.82

 

 

 

 

 

 

 

 

 

 

 

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

 

10


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,

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

Interest and dividends income

 

$

520

 

 

$

570

 

Interest expense

 

 

  (539

)

 

 

    (589

)

Net recognized gains on investments

 

 

371

 

 

 

125

 

Net gains (losses) on derivatives

 

 

(7

)

 

 

3

 

Net gains (losses) on foreign currency remeasurements

 

 

(65

)

 

 

139

 

Other, net

 

 

6

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

286

 

 

$

248

 

 

 

 

 

 

 

 

 

 

 

Net Recognized Gains (Losses) on Investments

 

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

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

Realized gains from sales of available-for-sale securities

 

$

19

 

 

$

19

 

Realized losses from sales of available-for-sale securities

 

 

(7

)

 

 

(5

)

Impairments and allowance for credit losses

 

 

(3

)

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

9

 

 

$

17

 

 

 

 

 

 

 

 

 

 

 

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

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

Net realized gains on investments sold

 

$

37

 

 

$

17

 

Net unrealized gains on investments still held

 

 

325

 

 

 

100

 

Impairments of investments

 

 

0

 

 

 

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

362

 

 

$

108

 

 

 

 

 

 

 

 

 

 

 

11


PART I

Item 1

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

Level 2

 

 

$

8,183

 

 

$

0

 

 

$

0

 

 

$

8,183

 

 

$

4,686

 

 

$

3,497

 

 

$

0

 

Certificates of deposit

 

Level 2

 

 

 

3,054

 

 

 

0

 

 

 

0

 

 

 

3,054

 

 

 

2,809

 

 

 

245

 

 

 

0

 

U.S. government securities

 

Level 1

 

 

 

89,437

 

 

 

3,382

 

 

 

(134

)

 

 

92,685

 

 

 

3

 

 

 

92,682

 

 

 

0

 

U.S. agency securities

 

Level 2

 

 

 

2,943

 

 

 

1

 

 

 

0

 

 

 

2,944

 

 

 

1,119

 

 

 

1,825

 

 

 

0

 

Foreign government bonds

 

Level 2

 

 

 

3,130

 

 

 

6

 

 

 

(4

)

 

 

3,132

 

 

 

2,487

 

 

 

645

 

 

 

0

 

Mortgage- and asset-backed securities

 

Level 2

 

 

 

3,461

 

 

 

20

 

 

 

(7

)

 

 

3,474

 

 

 

0

 

 

 

3,474

 

 

 

0

 

Corporate notes and bonds

 

Level 2

 

 

 

8,346

 

 

 

205

 

 

 

(13

)

 

 

8,538

 

 

 

0

 

 

 

8,538

 

 

 

0

 

Corporate notes and bonds

 

Level 3

 

 

 

53

 

 

 

0

 

 

 

0

 

 

 

53

 

 

 

0

 

 

 

53

 

 

 

0

 

Municipal securities

 

Level 2

 

 

 

306

 

 

 

58

 

 

 

0

 

 

 

364

 

 

 

0

 

 

 

364

 

 

 

0

 

Municipal securities

 

Level 3

 

 

 

103

 

 

 

0

 

 

 

(7

)

 

 

96

 

 

 

0

 

 

 

96

 

 

 

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt investments

 

 

 

 

$

119,016

 

 

$

3,672

 

 

$

(165

)

 

$

122,523

 

 

$

11,104

 

 

$

111,419

 

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value Recorded in Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity investments

 

Level 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,781

 

 

$

1,198

 

 

$

0

 

 

$

583

 

Equity investments

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,810

 

 

 

0

 

 

 

0

 

 

 

5,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

7,591

 

 

$

1,198

 

 

$

0

 

 

$

6,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6,863

 

 

$

6,863

 

 

$

0

 

 

$

0

 

Derivatives, net (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31