Quarterly Report


Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


 

x

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

For the Quarterly Period Ended March 31, 2013

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: 0-14278

 


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  x  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes  x  No  ¨

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

 

Large accelerated filer  x

  

Accelerated filer  ¨

Non-accelerated filer  ¨   (Do not check if a smaller reporting company)

  

Smaller reporting company  ¨

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

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

 

Class    Outstanding at April 11, 2013  


Common Stock, $0.00000625 par value per share

     8,351,106,590 shares   

 



Table of Contents

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended March 31, 2013

INDEX

 

                 Page  

PART I.

  FINANCIAL INFORMATION        
    Item 1.   Financial Statements        
        a)    Income Statements for the Three and Nine Months Ended March 31, 2013 and 2012     3   
        b)    Comprehensive Income Statements for the Three and Nine Months Ended March 31, 2013 and 2012     4   
        c)    Balance Sheets as of March 31, 2013 and June 30, 2012     5   
        d)    Cash Flows Statements for the Three and Nine Months Ended March 31, 2013 and 2012     6   
        e)    Stockholders’ Equity Statements for the Three and Nine Months Ended March 31, 2013 and 2012     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     48   
    Item 4.   Controls and Procedures     49   

PART II.

  OTHER INFORMATION        
    Item 1.   Legal Proceedings     49   
    Item 1A.   Risk Factors     49   
    Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     57   
    Item 6.   Exhibits     57   

SIGNATURE

    58   

 

2


Table of Contents

PART I

Item 1

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INCOME STATEMENTS

 

(In millions, except per share amounts) (Unaudited)    Three Months Ended
March 31,
    Nine Months Ended
March 31,
 


     2013     2012     2013     2012  

Revenue

   $   20,489      $   17,407      $   57,953      $   55,664   

Cost of revenue

     4,787        3,952        14,647        13,367   


 


 


 


Gross profit

     15,702        13,455        43,306        42,297   

Operating expenses:

                                

Research and development

     2,640        2,517        7,628        7,217   

Sales and marketing

     3,794        3,414        11,048        10,076   

General and administrative

     1,656        1,150        3,939        3,433   


 


 


 


Total operating expenses

     8,090        7,081        22,615        20,726   


 


 


 


Operating income

     7,612        6,374        20,691        21,571   

Other income (expense)

     (9     (11     216        337   


 


 


 


Income before income taxes

     7,603        6,363        20,907        21,908   

Provision for income taxes

     1,548        1,255        4,009        4,438   


 


 


 


Net income

   $ 6,055      $ 5,108      $ 16,898      $ 17,470   
    


 


 


 


Earnings per share:

                                

Basic

   $ 0.72      $ 0.61      $ 2.02      $ 2.08   

Diluted

   $ 0.72      $ 0.60      $ 1.99      $ 2.05   

Weighted average shares outstanding:

                                

Basic

     8,364        8,401        8,385        8,398   

Diluted

     8,429        8,498        8,472        8,502   

Cash dividends declared per common share

   $ 0.23      $ 0.20      $ 0.69      $ 0.60   


See accompanying notes.

 

3


Table of Contents

PART I

Item 1

 

COMPREHENSIVE INCOME STATEMENTS

 

(In millions) (Unaudited)    Three Months Ended
March 31,
    Nine Months Ended
March 31,
 


     2013     2012     2013     2012  

Net income

   $     6,055      $     5,108      $   16,898      $   17,470   

Other comprehensive income (loss):

                                

Net unrealized gains (losses) on derivatives (net of tax effects of $19 , $(24), $(10) , and $103)

     35        (44     (19     192   

Net unrealized gains (losses) on investments (net of tax effects of $150 , $255, $401 , and $(297))

     278        474        744        (551

Translation adjustments and other (net of tax effects of $(61) , $41, $31 and $(93))

     (114     76        58        (172


 


 


 


Other comprehensive income (loss)

     199        506        783        (531


 


 


 


Comprehensive income

   $ 6,254      $ 5,614      $ 17,681      $ 16,939   
    


 


 


 


See accompanying notes.

 

4


Table of Contents

PART I

Item 1

 

BALANCE SHEETS

 

(In millions) (Unaudited)             


March 31,

2013

    June 30,
2012
 

Assets

                

Current assets:

                

Cash and cash equivalents

   $ 5,240      $ 6,938   

Short-term investments (including securities loaned of $493 and $785)

     69,243        56,102   


 


Total cash, cash equivalents, and short-term investments

     74,483        63,040   

Accounts receivable, net of allowance for doubtful accounts of $267 and $389

     11,991        15,780   

Inventories

     2,133        1,137   

Deferred income taxes

     1,676        2,035   

Other

     3,241        3,092   


 


Total current assets

     93,524        85,084   

Property and equipment, net of accumulated depreciation of $12,247 and $10,962

     9,204        8,269   

Equity and other investments

     11,193        9,776   

Goodwill

     14,682        13,452   

Intangible assets, net

     3,240        3,170   

Other long-term assets

     2,262        1,520   


 


Total assets

   $   134,105      $   121,271   
    


 


Liabilities and stockholders’ equity

                

Current liabilities:

                

Accounts payable

   $ 4,532      $ 4,175   

Current portion of long-term debt

     2,246        1,231   

Accrued compensation

     3,474        3,875   

Income taxes

     689        789   

Short-term unearned revenue

     16,511        18,653   

Securities lending payable

     564        814   

Other

     3,913        3,151   


 


Total current liabilities

     31,929        32,688   

Long-term debt

     11,949        10,713   

Long-term unearned revenue

     1,394        1,406   

Deferred income taxes

     2,424        1,893   

Other long-term liabilities

     9,721        8,208   


 


Total liabilities

     57,417        54,908   


 


Commitments and contingencies

                

Stockholders’ equity:

                

Common stock and paid-in capital—shares authorized 24,000; outstanding 8,349 and 8,381

     66,826        65,797   

Retained earnings (deficit)

     7,657        (856

Accumulated other comprehensive income

     2,205        1,422   


 


Total stockholders’ equity

     76,688        66,363   


 


Total liabilities and stockholders’ equity

   $ 134,105      $ 121,271   
    


 


See accompanying notes.

 

5


Table of Contents

PART I

Item 1

 

CASH FLOWS STATEMENTS

 

(In millions) (Unaudited)   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 


     2013     2012     2013     2012  

Operations

                                

Net income

   $ 6,055      $ 5,108      $ 16,898      $ 17,470   

Adjustments to reconcile net income to net cash from operations:

                                

Depreciation, amortization, and other

     1,053        766        2,772        2,170   

Stock-based compensation expense

     599        591        1,805        1,724   

Net recognized losses (gains) on investments and derivatives

     (52     68        (19     (74

Excess tax benefits from stock-based compensation

     (6     (10     (192     (84

Deferred income taxes

     226        (134     404        282   

Deferral of unearned revenue

     9,686        8,142        28,632        21,825   

Recognition of unearned revenue

     (11,599     (8,283     (30,852     (23,993

Changes in operating assets and liabilities:

                                

Accounts receivable

     2,191        2,770        3,859        3,851   

Inventories

     (483     (50     (989     (79

Other current assets

     139        73        (96     938   

Other long-term assets

     (13     9        (326     (36

Accounts payable

     (67     (114     51        (380

Other current liabilities

     1,238        492        119        (107

Other long-term liabilities

     699        166        864        442   


 


 


 


Net cash from operations

     9,666        9,594        22,930        23,949   


 


 


 


Financing

                                

Proceeds from issuance of debt

     0        0        2,232        0   

Common stock issued

     203        1,091        765        1,635   

Common stock repurchased

     (1,028     (1,023     (4,318     (3,999

Common stock cash dividends paid

     (1,925     (1,683     (5,534     (4,707

Excess tax benefits from stock-based compensation

     6        10        192        84   

Other

     0        0        (16     0   


 


 


 


Net cash used in financing

     (2,744     (1,605     (6,679     (6,987


 


 


 


Investing

                                

Additions to property and equipment

     (930     (749     (2,463     (1,683

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

     (108     (84     (1,564     (9,586

Purchases of investments

       (18,160       (23,951       (48,372       (45,297

Maturities of investments

     1,265        4,236        4,513        13,122   

Sales of investments

     9,730        7,946        30,163        23,317   

Securities lending payable

     543        361        (249     3   


 


 


 


Net cash used in investing

     (7,660     (12,241     (17,972     (20,124


 


 


 


Effect of exchange rates on cash and cash equivalents

     (39     30        23        (60


 


 


 


Net change in cash and cash equivalents

     (777     (4,222     (1,698     (3,222

Cash and cash equivalents, beginning of period

     6,017        10,610        6,938        9,610   


 


 


 


Cash and cash equivalents, end of period

   $ 5,240      $ 6,388      $ 5,240      $ 6,388   
    


 


 


 


See accompanying notes.

 

6


Table of Contents

PART I

Item 1

 

STOCKHOLDERS’ EQUITY STATEMENTS

 

(In millions) (Unaudited)   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 


     2013     2012     2013     2012  

Common stock and paid-in capital

                                

Balance, beginning of period

   $   66,334      $   63,902      $   65,797      $   63,415   

Common stock issued

     203        1,091        755        1,635   

Common stock repurchased

     (313     (262     (1,711     (1,426

Stock-based compensation expense

     599        591        1,805        1,724   

Stock-based compensation income tax benefits (deficiencies)

     2        (50     174        (79

Other, net

     1        1        6        4   


 


 


 


Balance, end of period

     66,826        65,273        66,826        65,273   


 


 


 


Retained earnings (deficit)

                                

Balance, beginning of period

     4,236        (607     (856     (8,195

Net income

     6,055        5,108        16,898        17,470   

Common stock cash dividends

     (1,919     (1,686     (5,778     (5,046

Common stock repurchased

     (715     (761     (2,607     (2,175


 


 


 


Balance, end of period

     7,657        2,054        7,657        2,054   


 


 


 


Accumulated other comprehensive income

                                

Balance, beginning of period

     2,006        826        1,422        1,863   

Other comprehensive income (loss)

     199        506        783        (531


 


 


 


Balance, end of period

     2,205        1,332        2,205        1,332   


 


 


 


Total stockholders’ equity

   $ 76,688      $ 68,659      $ 76,688      $ 68,659   
    


 


 


 


See accompanying notes.

 

7


Table of Contents

PART I

Item 1

 

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

In the opinion of management, the accompanying balance sheets and related interim statements of income, comprehensive income, cash flows, and stockholders’ equity include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). 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 2012 Form 10-K filed on July 26, 2012 with the U.S. Securities and Exchange Commission.

Principles of Consolidation

The financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments through which we exercise significant influence over but do not control the investee and are not the primary beneficiary of the investee’s activities are accounted for using the equity method. Investments through which we are not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method.

Estimates and Assumptions

Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples of estimates include: loss contingencies; product warranties; the fair value of, and/or potential goodwill impairment for, our reporting units; product life cycles; useful lives of our tangible and intangible assets; allowances for doubtful accounts; allowances for product returns; the market value of our inventory; and stock-based compensation forfeiture rates. Examples of assumptions include: the elements comprising a software arrangement, including the distinction between upgrades or enhancements and new products; when technological feasibility is achieved for our products; the potential outcome of future tax consequences of events that have been recognized in our financial statements or tax returns; and determining when investment impairments are other-than-temporary. Actual results and outcomes may differ from management’s estimates and assumptions.

Recasting of Certain Prior Period Information

We have recast certain prior period amounts to conform to the current period presentation, including the reclassification of accumulated other comprehensive income (“AOCI”) from retained earnings to a separate component of stockholders’ equity, the reclassification of cost of revenue from operating expenses to a separate line and the addition of a gross profit line in the income statements, and the recasting of segment information for immaterial movements of business activities between segments and changes in cost allocations, with no impact on consolidated net income or cash flows.

Recent Accounting Guidance

Recently adopted accounting guidance

In September 2011, the Financial Accounting Standards Board (“FASB”) issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. We adopted this new guidance beginning July 1, 2012. Adoption of this new guidance did not have a material impact on our financial statements.

In June 2011, the FASB issued guidance on presentation of comprehensive income. The new guidance eliminated the option to report other comprehensive income (“OCI”) and its components in the statement of changes in stockholders’ equity. Instead, an entity is required to present either a continuous statement of net income and OCI or in two separate but consecutive statements. We adopted this new guidance beginning July 1, 2012. Adoption of this new guidance resulted only in changes to presentation of our financial statements.

 

8


Table of Contents

PART I

Item 1

 

Recent accounting guidance not yet adopted

In December 2011, the FASB issued guidance enhancing disclosure requirements about the nature of an entity’s right to offset and related arrangements associated with its financial instruments and derivative instruments. The new guidance requires the disclosure of the gross amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed, and the related net exposure. In January 2013, the FASB clarified that the scope of this guidance applies to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement, or similar agreements. The new guidance will be effective for us beginning July 1, 2013. Other than requiring additional disclosures, we do not anticipate material impacts on our financial statements upon adoption.

In February 2013, the FASB issued guidance on disclosure requirements for items reclassified out of AOCI. This new guidance requires entities to present (either on the face of the income statement or in the notes) the effects on the line items of the income statement for amounts reclassified out of AOCI. The new guidance will be effective for us beginning July 1, 2013. Other than requiring additional disclosures, we do not anticipate material impacts on our financial statements upon adoption.

In March 2013, the FASB issued guidance on a parent’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning July 1, 2014. We do not anticipate material impacts on our financial statements upon adoption.

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, stock awards, and shared performance stock awards. The components of basic and diluted EPS are as follows:

 

(In millions, except earnings per share)   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 


     2013     2012     2013     2012  

Net income available for common shareholders (A)

   $     6,055      $     5,108      $   16,898      $   17,470   

Weighted average outstanding shares of common stock (B)

     8,364        8,401        8,385        8,398   

Dilutive effect of stock-based awards

     65        97        87        104   


 


 


 


Common stock and common stock equivalents (C)

     8,429        8,498        8,472        8,502   
    


 


 


 


Earnings Per Share

                                

Basic (A/B)

   $ 0.72      $ 0.61      $ 2.02      $ 2.08   

Diluted (A/C)

   $ 0.72      $ 0.60      $ 1.99      $ 2.05   


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

In June 2010, we issued $1.25 billion of zero-coupon debt securities that are convertible into shares of our common stock. As of March 31, 2013, none of these securities were included in the calculation of diluted EPS as they would have been anti-dilutive. See Note 11 – Debt for additional information.

 

9


Table of Contents

PART I

Item 1

 

NOTE 3 — OTHER INCOME (EXPENSE)

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

 

(In millions)   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 


     2013     2012     2013     2012  

Dividends and interest income

   $ 150      $ 180      $ 475      $ 573   

Interest expense

       (109     (95       (309       (284

Net recognized gains on investments

     57        34        85        352   

Net losses on derivatives

     (5       (102     (66     (278

Net losses on foreign currency remeasurements

     (22     (8     (58     (52

Other

     (80     (20     89        26   


 


 


 


Total

   $ (9   $ (11   $ 216      $ 337   
    


 


 


 


Following are details of net recognized gains (losses) on investments during the periods reported:

 

(In millions)   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 


     2013     2012     2013     2012  

Other-than-temporary impairments of investments

   $     (22   $ (82   $   (152   $ (234

Realized gains from sales of available-for-sale securities

     113        232        323          1,075   

Realized losses from sales of available-for-sale securities

     (34       (116     (86     (489


 


 


 


Total

   $ 57      $ 34      $ 85      $ 352   
    


 


 


 


NOTE 4 — INVESTMENTS

Investment Components

The components of investments, including associated derivatives, were as follows:

 

(In millions)    Cost Basis    

Unrealized

Gains

   

Unrealized

Losses

   

Recorded

Basis

   

Cash

and Cash

Equivalents

   

Short-term

Investments

   

Equity

and Other

Investments

 


March 31, 2013                                           

Cash

   $ 2,271      $ 0      $ 0      $ 2,271      $ 2,271      $ 0      $ 0   

Mutual funds

     1,064        0        0        1,064        1,064        0        0   

Commercial paper

     186        0        0        186        186        0        0   

Certificates of deposit

     933        0        0        933        550        383        0   

U.S. government and agency securities

     60,870        139        (2     61,007        69        60,938        0   

Foreign government bonds

     1,141        34        (15     1,160        0        1,160        0   

Mortgage-backed securities

     1,271        59        (1     1,329        0        1,329        0   

Corporate notes and bonds

     5,842        261        (4     6,099        1,100        4,999        0   

Municipal securities

     357        65        0        422        0        422        0   

Common and preferred stock

     7,063        3,033        (190     9,906        0        0        9,906   

Other investments

     1,299        0        0        1,299        0        12        1,287   


 


 


 


 


 


 


Total

   $   82,297      $     3,591      $       (212   $   85,676      $     5,240      $   69,243      $   11,193   
    


 


 


 


 


 


 


 

10


Table of Contents

PART I

Item 1

 

(In millions)    Cost Basis    

Unrealized

Gains

    Unrealized
Losses
    Recorded
Basis
    Cash
and Cash
Equivalents
    Short-term
Investments
    Equity
and Other
Investments
 


June 30, 2012                                           

Cash

   $ 2,019      $ 0      $ 0      $ 2,019      $ 2,019      $ 0      $ 0   

Mutual funds

     820        0        0        820        820        0        0   

Commercial paper

     96        0        0        96        96        0        0   

Certificates of deposit

     744        0        0        744        342        402        0   

U.S. government and agency securities

     47,178        130        (2     47,306        561        46,745        0   

Foreign government bonds

     1,741        18        (29     1,730        575        1,155        0   

Mortgage-backed securities

     1,816        82        (2     1,896        0        1,896        0   

Corporate notes and bonds

     7,799        224        (15     8,008        2,525        5,483        0   

Municipal securities

     358        58        0        416        0        416        0   

Common and preferred stock

     6,965        2,204        (436     8,733        0        0        8,733   

Other investments

     1,048        0        0        1,048        0        5        1,043   


 


 


 


 


 


 


Total

   $   70,584      $     2,716      $       (484   $   72,816      $     6,938      $   56,102      $     9,776   
    


 


 


 


 


 


 


Unrealized Losses on Investments

Investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:

 

     Less than 12 Months

    12 Months or Greater

         

Total

Unrealized

Losses

 
(In millions)    Fair Value     Unrealized
Losses
    Fair Value     Unrealized
Losses
    Total
Fair Value
   


March 31, 2013                                     

U.S. government and agency securities

   $ 213      $ (2   $ 0      $ 0      $ 213      $ (2

Foreign government bonds

     151        (2     79        (13     230        (15

Mortgage-backed securities

     52        0        42        (1     94        (1

Corporate notes and bonds

     364        (1     30        (3     394        (4

Common and preferred stock

     1,059        (107     426        (83     1,485        (190


 


 


 


 


 


Total

   $   1,839      $     (112   $      577      $     (100   $   2,416      $     (212
    


 


 


 


 


 


 

     Less than 12 Months

    12 Months or Greater

         

Total

Unrealized

Losses

 
(In millions)    Fair Value     Unrealized
Losses
    Fair Value     Unrealized
Losses
    Total
Fair Value
   


June 30, 2012                                     

U.S. government and agency securities

   $ 44      $ (2   $ 0      $ 0      $ 44      $ (2

Foreign government bonds

     657        (27     12        (2     669        (29

Mortgage-backed securities

     53        0        48        (2     101        (2

Corporate notes and bonds

     640        (11     70        (4     710        (15

Common and preferred stock

     2,135        (329     305        (107     2,440        (436


 


 


 


 


 


Total

   $   3,529      $     (369   $      435      $     (115   $   3,964      $     (484
    


 


 


 


 


 


Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Unrealized losses from domestic and international equities are due to market price movements. Management does not believe any remaining unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of March 31, 2013.

 

11


Table of Contents

PART I

Item 1

 

At March 31, 2013 and June 30, 2012, the recorded bases of common and preferred stock and other investments that are restricted for more than one year or are not publicly traded were $380 million and $313 million, respectively. These investments are carried at cost and are reviewed quarterly for indicators of other-than-temporary impairment. It is not possible for us to reliably estimate the fair value of these investments.

Debt Investment Maturities

 

(In millions)    Cost Basis    

Estimated

Fair Value

 


March 31, 2013             

Due in one year or less

   $   33,279      $   33,331   

Due after one year through five years

     32,128        32,267   

Due after five years through 10 years

     3,098        3,319   

Due after 10 years

     2,095        2,219   


 


Total

   $ 70,600      $ 71,136   
    


 


NOTE 5 — DERIVATIVES

We use derivative instruments to: manage risks related to foreign currencies, equity prices, interest rates, and credit; enhance investment returns; and facilitate portfolio diversification. Our objectives for holding derivatives include reducing, eliminating, and efficiently managing the economic impact of these exposures as effectively as possible. Our derivative programs include strategies that both qualify and do not qualify for hedge accounting treatment. All notional amounts presented below are measured in U.S. currency equivalents.

Foreign Currency

Certain forecasted transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures daily to maximize the economic effectiveness of our foreign currency hedge positions. Option and forward contracts are used to hedge a portion of forecasted international revenue for up to three years in the future and are designated as cash flow hedging instruments. Principal currencies hedged include the euro, Japanese yen, British pound, and Canadian dollar. As of March 31, 2013 and June 30, 2012, the total notional amounts of these foreign exchange contracts sold were $4.5 billion and $6.7 billion, respectively.

Foreign currency risks related to certain non-U.S. dollar denominated securities are hedged using foreign exchange forward contracts that are designated as fair value hedging instruments. As of March 31, 2013 and June 30, 2012, the total notional amounts of these foreign exchange contracts sold were $622 million and $1.3 billion, respectively.

Certain options and forwards not designated as hedging instruments are also used to manage the variability in exchange rates on accounts receivable, cash, and intercompany positions, and to manage other foreign currency exposures. As of March 31, 2013, the total notional amounts of these foreign exchange contracts purchased and sold were $3.8 billion and $4.4 billion, respectively. As of June 30, 2012, the total notional amounts of these foreign exchange contracts purchased and sold were $3.6 billion and $7.3 billion, respectively.

Equity

Securities held in our equity and other investments portfolio are subject to market price risk. Market price risk is managed relative to broad-based global and domestic equity indices using certain convertible preferred investments, options, futures, and swap contracts not designated as hedging instruments. From time to time, to hedge our price risk, we may use and designate equity derivatives as hedging instruments, including puts, calls, swaps, and forwards. As of March 31, 2013, the total notional amounts of designated and non-designated equity contracts purchased and sold were both $1.1 billion. As of June 30, 2012, the total notional amounts of designated and non-designated equity contracts purchased and sold were $1.4 billion and $982 million, respectively.

 

12


Table of Contents

PART I

Item 1

 

Interest Rate

Securities held in our fixed-income portfolio are subject to different interest rate risks based on their maturities. We manage the average maturity of our fixed-income portfolio to achieve economic returns that correlate to certain broad-based fixed-income indices using exchange-traded option and futures contracts and over-the-counter swap and option contracts, none of which are designated as hedging instruments. As of March 31, 2013, the total notional amounts of fixed-interest rate contracts purchased and sold were $1.4 billion and $1.6 billion, respectively. As of June 30, 2012, the total notional amounts of fixed-interest rate contracts purchased and sold were $3.2 billion and $1.9 billion, respectively.

In addition, we use “To Be Announced” forward purchase commitments of mortgage-backed assets to gain exposure to agency mortgage-backed securities. These meet the definition of a derivative instrument in cases where physical delivery of the assets is not taken at the earliest available delivery date. As of March 31, 2013 and June 30, 2012, the total notional derivative amounts of mortgage contracts purchased were $1.2 billion and $1.1 billion, respectively.

Credit

Our fixed-income portfolio is diversified and consists primarily of investment-grade securities. We use credit default swap contracts, not designated as hedging instruments, to manage credit exposures relative to broad-based indices and to facilitate portfolio diversification. We use credit default swaps as they are a low-cost method of managing exposure to individual credit risks or groups of credit risks. As of March 31, 2013, the total notional amounts of credit contracts purchased and sold were $362 million and $466 million, respectively. As of June 30, 2012, the total notional amounts of credit contracts purchased and sold were $318 million and $456 million, respectively.

Commodity

We use broad-based commodity exposures to enhance portfolio returns and to facilitate portfolio diversification. We use swaps, futures, and option contracts, not designated as hedging instruments, to generate and manage exposures to broad-based commodity indices. We use derivatives on commodities as they can be low-cost alternatives to the purchase and storage of a variety of commodities, including, but not limited to, precious metals, energy, and grain. As of March 31, 2013, the total notional amounts of commodity contracts purchased and sold were $1.3 billion and $284 million, respectively. As of June 30, 2012, the total notional amounts of commodity contracts purchased and sold were $1.5 billion and $445 million, respectively.

Credit-Risk-Related Contingent Features

Certain of our counterparty agreements for derivative instruments contain provisions that require our issued and outstanding long-term unsecured debt to maintain an investment grade credit rating and require us to maintain minimum liquidity of $1.0 billion. To the extent we fail to meet these requirements, we will be required to post collateral, similar to the standard convention related to over-the-counter derivatives. As of March 31, 2013, our long-term unsecured debt rating was AAA, and cash investments were in excess of $1.0 billion. As a result, no collateral was required to be posted.

Fair Values of Derivative Instruments

Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

For derivative instruments designated as fair-value hedges, the gains (losses) are recognized in earnings in the periods of change together with the offsetting losses (gains) on the hedged items attributed to the risk being hedged. For options designated as fair-value hedges, changes in the time value are excluded from the assessment of hedge effectiveness and are recognized in earnings.

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

 

13


Table of Contents

PART I

Item 1

 

For derivative instruments that are not designated as hedges, gains (losses) from changes in fair values are primarily recognized in other income (expense). Other than those derivatives entered into for investment purposes, such as commodity contracts, the gains (losses) are generally economically offset by unrealized gains (losses) in the underlying available-for-sale securities, which are recorded as a component of OCI until the securities are sold or other-than-temporarily impaired, at which time the amounts are reclassified from AOCI into other income (expense).

The following tables present the gross fair values of derivative instruments designated as hedging instruments (“designated hedge derivatives”) and not designated as hedging instruments (“non-designated hedge derivatives”). The fair values exclude the impact of netting derivative assets and liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk:

 

(In millions)   

Foreign

Exchange

Contracts

   

Equity

Contracts

   

Interest

Rate

Contracts

   

Credit

Contracts

   

Commodity

Contracts

   

Total

Derivatives

 


March 31, 2013                                     

Assets

                                                

Non-designated hedge derivatives:

                                                

Short-term investments

   $ 18      $ 156      $ 7      $ 17      $ 3      $ 201   

Other current assets

     35        0        0        0        0        35   


 


 


 


 


 


Total

   $ 53      $ 156      $ 7      $ 17      $ 3      $ 236   

Designated hedge derivatives:

                                                

Short-term investments

   $ 8      $ 0      $ 0      $ 0      $ 0      $ 8   

Other current assets

     128        0        0        0        0        128   


 


 


 


 


 


Total

   $ 136      $ 0      $ 0      $ 0      $ 0      $ 136   
    


 


 


 


 


 


Total assets

   $ 189      $ 156      $ 7      $ 17      $ 3      $ 372   
    


 


 


 


 


 


Liabilities

                                                

Non-designated hedge derivatives:

                                                

Other current liabilities

   $ (77   $ (16   $ (6   $ (14   $ 0      $ (113

Designated hedge derivatives:

                                                

Other current liabilities

   $ (2   $ 0      $ 0      $ 0      $ 0      $ (2


 


 


 


 


 


Total liabilities

   $     (79   $     (16   $       (6   $     (14   $        0      $   (115
    


 


 


 


 


 


 

(In millions)   

Foreign

Exchange

Contracts

   

Equity

Contracts

   

Interest

Rate

Contracts

   

Credit

Contracts

   

Commodity

Contracts

   

Total

Derivatives

 


June 30, 2012                                     

Assets

                                                

Non-designated hedge derivatives:

                                                

Short-term investments

   $ 14      $ 162      $ 10      $ 26      $ 3      $ 215   

Other current assets

     85        0        0        0        0        85   


 


 


 


 


 


Total

   $ 99      $ 162      $ 10      $ 26      $ 3      $ 300   

Designated hedge derivatives:

                                                

Short-term investments

   $ 6      $ 0      $ 0      $ 0      $ 0      $ 6   

Other current assets

     177        0        0        0        0        177   


 


 


 


 


 


Total

   $ 183      $ 0      $ 0      $ 0      $ 0      $ 183   
    


 


 


 


 


 


Total assets

   $ 282      $ 162      $ 10      $ 26      $ 3      $ 483   
    


 


 


 


 


 


Liabilities

                                                

Non-designated hedge derivatives:

                                                

Other current liabilities

   $ (84   $ (19   $ (17   $ (21   $ 0      $ (141

Designated hedge derivatives:

                                                

Other current liabilities

   $ (14   $ 0      $ 0      $ 0      $ 0      $ (14


 


 


 


 


 


Total liabilities

   $     (98   $     (19   $     (17   $     (21   $        0      $   (155
    


 


 


 


 


 


 

14


Table of Contents

PART I

Item 1

 

See also Note 4 – Investments and Note 6 – Fair Value Measurements.

Fair-Value Hedge Gains (Losses)

We recognized in other income (expense) the following gains (losses) on contracts designated as fair value hedges and their related hedged items:

 

(In millions)   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 


     2013     2012     2013     2012  

Foreign Exchange Contracts

                                

Derivatives

   $ 45      $ (12   $ 68      $ 36   

Hedged items

       (47     11          (68       (37


 


 


 


Total

   $ (2   $    (1   $ 0      $ (1
    


 


 


 


Cash Flow Hedge Gains (Losses)

We recognized the following gains (losses) on foreign exchange contracts designated as cash flow hedges (our only cash flow hedges during the periods presented):

 

(In millions)   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 


     2013     2012     2013     2012  

Effective Portion

                                

Gains (losses) recognized in OCI, net of tax effects of $36 and $(28) for the three months ended March 31, 2013 and 2012, and $31 and $74 for the nine months ended March 31, 2013 and 2012

   $ 66      $ (52   $ 56      $ 138   

Gains (losses) reclassified from AOCI into revenue

   $ 47      $ (12   $ 116      $ (82

Amount Excluded from Effectiveness Assessment and Ineffective Portion

                                

Losses recognized in other income (expense)

   $     (27   $   (107   $   (134   $   (172


We estimate that $108 million of net derivative gains included in AOCI at March 31, 2013 will be reclassified into earnings within the following 12 months. No significant amounts of gains (losses) were reclassified from AOCI into earnings as a result of forecasted transactions that failed to occur during the three and nine months ended March 31, 2013.

Non-Designated Derivative Gains (Losses)

Gains (losses) from changes in fair values of derivatives that are not designated as hedges are primarily recognized in other income (expense). These amounts are shown in the table below, with the exception of gains (losses) on derivatives presented in income statement line items other than other income (expense), which were immaterial for the periods presented. Other than those derivatives entered into for investment purposes, such as commodity contracts, the gains (losses) below are generally economically offset by unrealized gains (losses) in the underlying available-for-sale securities.

 

(In millions)   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 


     2013     2012     2013     2012  

Foreign exchange contracts

   $ (25   $ (44   $ (50   $ (109

Equity contracts

     8        5        25        (63

Interest-rate contracts

     (1     21        18        79   

Credit contracts

     10        (6     1        (13

Commodity contracts

     (5     (1     16        (89


 


 


 


Total

   $     (13   $     (25   $      10      $   (195
    


 


 


 


 

15


Table of Contents

PART I

Item 1

 

NOTE 6 — FAIR VALUE MEASUREMENTS

We account for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

   

Level 1 —inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. Our Level 1 non-derivative investments primarily include U.S. government securities, domestic and international equities, and actively traded mutual funds. Our Level 1 derivative assets and liabilities include those actively traded on exchanges.

 

   

Level 2 —inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and forward and spot prices for currencies and commodities. Our Level 2 non-derivative investments consist primarily of corporate notes and bonds, mortgage-backed securities, U.S. agency securities, certificates of deposit, and commercial paper. Our Level 2 derivative assets and liabilities primarily include certain over-the-counter option and swap contracts.

 

   

Level 3 —inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 non-derivative assets primarily comprise investments in certain corporate bonds and goodwill when it is recorded at fair value due to an impairment charge. We value the Level 3 corporate bonds using internally developed valuation models, inputs to which include interest rate curves, credit spreads, stock prices, and volatilities. Our Level 3 derivative assets and liabilities primarily comprise derivatives for foreign equities. In certain cases, market-based observable inputs are not available and we use management judgment to develop assumptions to determine fair value for these derivatives. Unobservable inputs used in all of these models are significant to the fair values of the assets and liabilities.

We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary.

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

 

16


Table of Contents

PART I

Item 1

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the fair value of our financial instruments that are measured at fair value on a recurring basis:

 

(In millions)

     Level 1        Level 2        Level 3       

 

Gross Fair

Value

  

  

    Netting (a)      
 
Net Fair
Value
  
  


March 31, 2013                                     

Assets

                                                

Mutual funds

   $ 1,064      $ 0      $ 0      $ 1,064      $ 0      $ 1,064   

Commercial paper

     0        186        0        186        0        186   

Certificates of deposit

     0        934        0        934        0        934   

U.S. government and agency securities

     58,370        2,636        0        61,006        0        61,006   

Foreign government bonds

     47        1,101        0        1,148        0        1,148   

Mortgage-backed securities

     0        1,328        0        1,328        0        1,328   

Corporate notes and bonds

     0        5,928        19        5,947        0        5,947   

Municipal securities

     0        422        0        422        0        422   

Common and preferred stock

     8,785        735        5        9,525        0        9,525   

Derivatives

     10        362        0        372        (93     279   


 


 


 


 


 


Total

   $   68,276      $   13,632      $   24      $   81,932      $     (93   $   81,839   
    


 


 


 


 


 


Liabilities

                                                

Derivatives and other

   $ 5      $ 110      $ 0      $ 115      $ (92   $ 23   


 

(In millions)

     Level 1        Level 2        Level 3       

 

Gross Fair

Value

  

  

    Netting (a)      
 
Net Fair
Value
  
  


June 30, 2012                                     

Assets

                                                

Mutual funds

   $ 820      $ 0      $ 0      $ 820      $ 0      $ 820   

Commercial paper

     0        96        0        96        0        96   

Certificates of deposit

     0        744        0        744        0        744   

U.S. government and agency securities

     42,291        5,019        0        47,310        0        47,310   

Foreign government bonds

     31        1,703        0        1,734        0        1,734   

Mortgage-backed securities

     0        1,892        0        1,892        0        1,892   

Corporate notes and bonds

     0        7,839        9        7,848        0        7,848   

Municipal securities

     0        416        0        416        0        416   

Common and preferred stock

     7,539        877        5        8,421        0        8,421   

Derivatives

     16        467        0        483        (141     342   


 


 


 


 


 


Total

   $   50,697      $   19,053      $   14      $   69,764      $   (141   $   69,623   
    


 


 


 


 


 


Liabilities

                                                

Derivatives and other

   $ 10      $ 145      $ 0      $ 155      $ (139   $ 16   


 

(a)

These amounts represent the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement exists and fair value adjustments related to our own credit risk and counterparty credit risk.

The following table reconciles the total Net Fair Value of assets above to the balance sheet presentation of these same assets in Note 4 – Investments.

 

17


Table of Contents

PART I

Item 1

 

(In millions)             


     March 31,
2013
    June 30,
2012
 

Net fair value of assets measured at fair value on a recurring basis

   $ 81,839      $ 69,623   

Cash

     2,271        2,019   

Common and preferred stock measured at fair value on a nonrecurring basis

     380        313   

Other investments measured at fair value on a nonrecurring basis

     1,287        1,043   

Less derivative net assets classified as other current assets

     (105     (185

Other

     4        3   


 


Recorded basis of investment components

   $   85,676      $   72,816   
    


 


Changes in Financial Instruments Measured at Level 3 Fair Value on a Recurring Basis

The following tables present the changes during the periods presented in our Level 3 financial instruments that are measured at fair value on a recurring basis. The majority of these instruments consist of investment securities classified as available-for-sale with changes in fair value included in OCI.

 

(In millions)    Corporate
Notes and
Bonds
    Common
and
Preferred
Stock
    Derivative
Assets
    Total  


Three and Nine Months Ended March 31, 2013                         

Balance as of June 30, 2012

   $ 9      $ 5      $ 0      $ 14   

Realized and unrealized gains (losses):

                                

Included in other income (expense)

     0        0        0        0   

Included in other comprehensive income (loss)

     0        0        0        0   

Purchases

     8        0        0        8   


 


 


 


Balance as of September 30, 2012

   $ 17      $ 5      $ 0      $ 22   

Realized and unrealized gains (losses):

                                

Included in other income (expense)

     0        0        0        0   

Included in other comprehensive income

     1        0        0        1   


 


 


 


Balance as of December 31, 2012

   $ 18      $ 5      $ 0      $ 23   

Realized and unrealized gains (losses):

                                

Included in other income (expense)

     0        0        0        0   

Included in other comprehensive income

     1        0        0        1   


 


 


 


Balance as of March 31, 2013

   $   19      $   5      $   0      $     24   
    


 


 


 


Change in unrealized gains (losses) included in other income (expense) for the three months ended March 31, 2013 related to assets held as of March 31, 2013

   $ 0      $ 0      $ 0      $ 0   

Change in unrealized gains (losses) included in other income (expense) for the nine months ended March 31, 2013 related to assets held as of March 31, 2013

   $ 0      $ 0      $ 0      $ 0   


 

18


Table of Contents

PART I

Item 1

 

(In millions)    Corporate
Notes and
Bonds
    Common
and
Preferred
Stock
    Derivative
Assets
    Total  


Three and Nine Months Ended March 31, 2012                         

Balance as of June 30, 2011

   $ 58      $ 5      $ 20      $ 83   

Realized and unrealized gains (losses):

                                

Included in other income (expense)

     0        0        (2     (2

Included in other comprehensive income

     (21     0        0        (21


 


 


 


Balance as of September 30, 2011

   $   37      $   5      $   18      $     60   

Realized and unrealized gains (losses):

                                

Included in other income (expense)

     0        0        (3     (3

Included in other comprehensive income

     0        0        0        0   

Conversions of Level 3 instruments to Level 1 instruments

     (28     0        (15     (43


 


 


 


Balance as of December 31, 2011

   $ 9      $ 5      $ 0      $ 14   

Realized and unrealized gains (losses):

                                

Included in other income (expense)

     0        0        0        0   

Included in other comprehensive income

     0        0        0        0   


 


 


 


Balance as of March 31, 2012

   $ 9      $ 5      $ 0      $ 14   
    


 


 


 


Change in unrealized gains (losses) included in other income (expense) for the three months ended March 31, 2012 related to assets held as of March 31, 2012

   $ 0      $ 0      $ 0      $ 0   

Change in unrealized gains (losses) included in other income (expense) for the nine months ended March 31, 2012 related to assets held as of March 31, 2012

   $ 0      $ 0      $ 0      $ 0   


Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

During the three and nine months ended March 31, 2013 and 2012, we did not record any material other-than-temporary impairments on financial assets required to be measured at fair value on a nonrecurring basis.

NOTE 7 — INVENTORIES

The components of inventories were as follows:

 

(In millions)             


March 31,

2013

    June 30,
2012
 

Raw materials

   $ 802      $ 210   

Work in process

     11        96   

Finished goods

     1,320        831   


 


Total

   $   2,133      $   1,137   
    


 


NOTE 8 — BUSINESS COMBINATIONS

Yammer

On July 18, 2012, we acquired Yammer, Inc. (“Yammer”), a leading provider of enterprise social networks, for $1.1 billion in cash. Yammer will continue to develop its standalone service and will add an enterprise social networking service to Microsoft’s portfolio of complementary cloud-based services. The major classes of assets to which we allocated the purchase price were goodwill of $937 million and identifiable intangible assets of $178 million. We assigned the goodwill to the Microsoft Business Division. Yammer was consolidated into our results of operations starting on the acquisition date.

 

19


Table of Contents

PART I

Item 1

 

Following are details of the purchase price allocated to the intangible assets acquired:

 

(In millions)          Weighted
Average Life
 


Customer-related

   $ 77        6 years   

Technology-based

     67        4 years   

Marketing-related

     34        7 years   


       

Total

   $   178        5 years   
    


       

Other

During the nine months ended March 31, 2013, we completed nine additional acquisitions for total consideration of $431 million, all of which was paid in cash. These entities have been included in our consolidated results of operations since their respective acquisition dates.

Pro forma results of operations have not been presented because the effects of the business combinations described in this Note, individually and in aggregate, were not material to our consolidated results of operations.

NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

 

(In millions)   

Balance as of

December 31,

2012

    Acquisitions     Other     Balance as of
March 31,
2013
 


Windows Division

   $ 89      $ 12      $            0      $ 101   

Server and Tools

     1,355        1        (2     1,354   

Online Services Division

     223        0        1        224   

Microsoft Business Division

     7,932        8        (41     7,899   

Entertainment and Devices Division

     5,128        0        (24     5,104   


 


 


 


Total

   $   14,727      $          21      $ (66   $   14,682   
    


 


 


 


 

(In millions)   

Balance as of

June 30,

2012

    Acquisitions     Other     Balance as of
March 31,
2013
 


Windows Division

   $ 89      $ 12      $            0      $ 101   

Server and Tools

     1,144        212        (2     1,354   

Online Services Division

     223        0        1        224   

Microsoft Business Division

     6,893        987        19        7,899   

Entertainment and Devices Division

     5,103        27        (26     5,104   


 


 


 


Total

   $   13,452      $     1,238      $ (8   $   14,682   
    


 


 


 


The measurement periods for purchase price allocations end as soon as information on the facts and circumstances becomes available, but do not exceed 12 months. Adjustments in purchase price allocations may require a recasting of the amounts allocated to goodwill retroactive to the periods in which the acquisitions occurred.

Any change in the goodwill amounts resulting from foreign currency translations are presented as “other” in the above table. Also included within “other” are business dispositions and transfers between business segments due to reorganizations, as applicable.

 

20


Table of Contents

PART I

Item 1

 

NOTE 10 — INTANGIBLE ASSETS

The components of intangible assets, all of which are finite-lived, were as follows:

 

(In millions)    Gross
Carrying
Amount
    Accumulated
Amortization
   

Net

Carrying
Amount

    Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Carrying
Amount
 


      

 

March 31,

2013

  

  

   

 

June 30,

2012

  

  

Technology-based (a)

   $ 4,052      $ (2,294   $ 1,758      $ 3,550      $ (1,899   $ 1,651   

Marketing-related

     1,363        (203     1,160        1,325        (136     1,189   

Contract-based

     823        (683     140        824        (644     180   

Customer-related

     497        (315     182        408        (258     150   


 


 


 


 


 


Total

   $   6,735      $   (3,495   $   3,240      $   6,107      $   (2,937   $   3,170   
    


 


 


 


 


 


 

(a)

Technology-based intangible assets included $265 million and $177 million as of March 31, 2013 and June 30, 2012, respectively, of net carrying amount of software to be sold, leased, or otherwise marketed.

Intangible assets amortization expense was $187 million and $563 million for the three and nine months ended March 31, 2013, respectively, as compared with $142 million and $406 million for the three and nine months ended March 31, 2012, respectively. Amortization of capitalized software was $52 million and $153 million for the three and nine months ended March 31, 2013, respectively, and $28 million and $85 million for the three and nine months ended March 31, 2012, respectively.

The following table outlines the estimated future amortization expense related to intangible assets held at March 31, 2013:

 

(In millions)       


Year Ending June 30,       

2013 (excluding the nine months ended March 31, 2013)

   $ 170   

2014

     613   

2015

     473   

2016

     389   

2017

     277   

Thereafter

     1,318   


Total

   $   3,240   
    


NOTE 11 — DEBT

As of March 31, 2013, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $14.2 billion and $15.0 billion, respectively. This is compared to a carrying value and estimated fair value of $11.9 billion and $13.2 billion, respectively, as of June 30, 2012. These estimated fair values are based on Level 2 inputs.

 

21


Table of Contents

PART I

Item 1

 

The components of our long-term debt, including the current portion, and the associated interest rates were as follows as of March 31, 2013 and June 30, 2012:

 

Due Date   

Face Value

March 31,
2013

   

Face Value

June 30,
2012

   

Stated
Interest

Rate

    

Effective
Interest

Rate

 


     (In millions)                     
Notes                          

September 27, 2013

   $ 1,000      $ 1,000        0.875%         1.000%   

June 1, 2014

     2,000        2,000        2.950%         3.049%   

September 25, 2015

     1,750        1,750        1.625%         1.795%   

February 8, 2016

     750        750        2.500%         2.642%   

November 15, 2017 (a)

     600        *        0.875%         1.084%   

June 1, 2019

     1,000        1,000        4.200%         4.379%   

October 1, 2020

     1,000        1,000        3.000%         3.137%   

February 8, 2021

     500        500        4.000%         4.082%   

November 15, 2022 (a)

     750        *        2.125%         2.239%   

June 1, 2039

     750        750        5.200%         5.240%   

October 1, 2040

     1,000        1,000        4.500%         4.567%   

February 8, 2041

     1,000        1,000        5.300%         5.361%   

November 15, 2042 (a)

     900        *        3.500%         3.571%   


                

Total

     13,000        10,750                    
Convertible Debt                          

June 15, 2013

     1,250        1,250        0.000%         1.849%   


                

Total

   $   14,250      $   12,000                    
    


 


                

 

(a)

In November 2012, we issued $2.25 billion of debt securities. The notes are senior unsecured obligations and rank equally with our other unsecured and unsubordinated debt outstanding.

 

*

Not applicable.

Interest on the notes is paid semi-annually. As of March 31, 2013 and June 30, 2012, the aggregate unamortized discount for our long-term debt, including the current portion, was $55 million and $56 million, respectively.

Notes

The Notes are senior unsecured obligations and rank equally with our other unsecured and unsubordinated debt outstanding.

Convertible Debt

In June 2010, we issued $1.25 billion of zero coupon convertible unsecured debt due on June 15, 2013 in a private placement offering. Proceeds from the offering were $1.24 billion, net of fees and expenses, which were capitalized. Initially, each $1,000 principal amount of notes was convertible into 29.94 shares of Microsoft common stock at a conversion price of $33.40 per share. The conversion ratio is adjusted periodically for dividends in excess of the initial dividend threshold as defined in the debt agreement. As of March 31, 2013, the net carrying amount of our convertible debt was $1.25 billion and the unamortized discount was $4 million.

The notes are convertible at any time. If converted, we will pay cash up to the aggregate principal amount of the notes and pay or deliver cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election.

Because the convertible debt may be wholly or partially settled in cash, we are required to separately account for the liability and equity components of the notes in a manner that reflects our nonconvertible debt borrowing rate when interest costs are recognized in subsequent periods. The net proceeds of $1.24 billion were allocated between debt for $1.18 billion and stockholders’ equity for $58 million with the portion in stockholders’ equity representing the fair value of the option to convert the debt.

 

22


Table of Contents

PART I

Item 1

 

In connection with issuance of the notes, we entered into capped call transactions with certain option counterparties who are initial purchasers of the notes or their affiliates. The capped call transactions are expected to reduce potential dilution of earnings per share upon conversion of the notes. Under the capped call transactions, we purchased from the option counterparties capped call options that in the aggregate relate to the total number of shares of our common stock underlying the notes, with a strike price equal to the conversion price of the notes and with an initial cap price equal to $37.16, which is adjusted periodically to mirror any adjustments to the conversion price. The purchased capped calls were valued at $40 million and recorded in stockholders’ equity.

NOTE 12 — INCOME TAXES

Our effective tax rate was approximately 20% for both the three months ended March 31, 2013 and 2012, and 19% and 20% for the nine months ended March 31, 2013 and 2012, respectively. Our effective tax rate was lower than the U.S. federal statutory rate primarily due to earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations centers in Ireland, Singapore, and Puerto Rico, which have lower income tax rates.

Tax contingencies and other tax liabilities were $9.1 billion and $7.6 billion as of March 31, 2013 and June 30, 2012, respectively, and are included in other long-term liabilities. This increase primarily relates to transfer pricing developments in certain foreign tax jurisdictions. While we settled a portion of the I.R.S. audit for tax years 2004 to 2006 during the third quarter of fiscal year 2011, we remain under audit for those years. In February 2012, the I.R.S. withdrew its 2011 Revenue Agents Report and reopened the audit phase of the examination. As of March 31, 2013, the primary unresolved issue relates to transfer pricing which could have a significant impact on our financial statements if not resolved favorably. We do not believe it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the next 12 months because we do not believe the remaining open issues will be resolved within the next 12 months. We also continue to be subject to examination by the I.R.S. for tax years 2007 to 2012.

We are subject to income tax in many jurisdictions outside the U.S. Our operations in certain jurisdictions remain subject to examination for tax years 1996 to 2012, some of which are currently under audit by local tax authorities. The resolutions of these audits are not expected to be material to our financial statements.

NOTE 13 — UNEARNED REVENUE

The components of unearned revenue were as follows:

 

(In millions)             


      

 

March 31,

2013

  

  

   

 

June 30,

2012

  

  

Volume licensing programs

   $ 14,205      $ 16,717   

Other (a)

     3,700        3,342   


 


Total

   $   17,905      $   20,059   
    


 


 

(a)

Other as of March 31, 2013 includes a net $784 million of unearned revenue associated with sales of the previous version of the Microsoft Office system with a guarantee to be upgraded to the new Office at minimal or no cost (the “Office Upgrade Offer”).

Other as of June 30, 2012 includes $540 million of unearned revenue associated with sales of Windows 7 with an option to upgrade to Windows 8 Pro at a discounted price (the “Windows Upgrade Offer”).

 

23


Table of Contents

PART I

Item 1

 

Unearned revenue by segment was as follows:

 

(In millions)             


      
 
March 31,
2013
  
  
   
 
June 30,
2012
  
  

Windows Division

   $ 1,593      $ 2,444   

Server and Tools

     6,496        7,445   

Microsoft Business Division

     8,404        9,015   

Other segments

     1,412        1,155   


 


Total

   $   17,905      $   20,059   
    


 


NOTE 14 — CONTINGENCIES

Antitrust, Unfair Competition, and Overcharge Class Actions

A large number of antitrust and unfair competition class action lawsuits were filed against us in various state, federal, and Canadian courts on behalf of various classes of direct and indirect purchasers of our PC operating system and certain other software products between 1999 and 2005. We obtained dismissals or reached settlements of all claims made in the United States.

All settlements in the United States have received final court approval. Under the settlements, generally class members can obtain vouchers that entitle them to be reimbursed for purchases of a wide variety of platform-neutral computer hardware and software. The total value of vouchers we may issue varies by state. We will make available to certain schools a percentage of those vouchers that are not issued or claimed (one-half to two-thirds depending on the state). The total value of vouchers we ultimately issue will depend on the number of class members who make claims and are issued vouchers. The maximum value of vouchers to be issued is approximately $2.7 billion. The actual costs of these settlements will be less than that maximum amount, depending on the number of class members and schools that are issued and redeem vouchers. We estimate the total cost to resolve all of the state overcharge class action cases will range between $1.9 billion and $2.0 billion. At March 31, 2013, we have recorded a liability related to these claims of approximately $500 million, which reflects our estimated exposure of $1.9 billion less payments made to date of approximately $1.4 billion mostly for vouchers, legal fees, and administrative expenses.

The three cases pending in British Columbia, Ontario, and Quebec, Canada have not been settled. In March 2010, the court in the British Columbia case certified it as a class action. In April 2011, the British Columbia Court of Appeal reversed the class certification ruling and dismissed the case, holding that indirect purchasers do not have a claim. The plaintiffs have filed an appeal to the Canadian Supreme Court, which was heard in the fall of 2012. The other two actions have been stayed.

Other Antitrust Litigation and Claims

In November 2004, Novell, Inc. (“Novell”) filed a complaint in U.S. District Court for the District of Utah (later transferred to federal court in Maryland), asserting antitrust and unfair competition claims against us related to Novell’s ownership of WordPerfect and other productivity applications during the period between June 1994 and March 1996. In June 2005, the trial court granted our motion to dismiss four of Novell’s six claims. In March 2010, the trial court granted summary judgment in favor of Microsoft as to all remaining claims. The court of appeals reversed that ruling as to one claim. Trial of that claim took place from October to December 2011 and resulted in a mistrial because the jury was unable to reach a verdict. In July 2012, the trial court granted Microsoft’s motion for judgment as a matter of law. Novell has appealed this decision to the U.S. Court of Appeals for the Tenth Circuit.

Government Competition Law Matters

In December 2009, the European Commission adopted a decision that rendered legally binding commitments offered by Microsoft to address the Commission’s concerns about the inclusion of Web browsing software in Windows. Among other things, Microsoft committed to display a “Browser Choice Screen” on Windows-based PCs in Europe where Internet Explorer is set as the default browser. Due to a technical error, we failed to deliver the requisite software to enable that display to PCs that came preinstalled with a version of Windows 7 called Windows 7

 

24


Table of Contents

PART I

Item 1

 

Service Pack 1. We did deliver the requisite software to PCs running the original version of Windows 7 and earlier editions of Windows. Following notification by the Commission of reports that some PCs were not receiving the update, we promptly fixed the error and advised the Commission of what we had discovered. PCs that come preinstalled with Windows 7 Service Pack 1 are now receiving the Browser Choice Screen software, as intended. After conducting an investigation and issuing a Statement of Objections in October 2012, the Commission concluded that Microsoft failed to comply with the 2009 commitments and imposed a fine of 561 million (approximately $733 million) on March 6, 2013. We will not appeal the fine. The amount was included in other current liabilities as of March 31, 2013.

Patent and Intellectual Property Claims

Motorola Litigation

In October 2010, Microsoft filed patent infringement complaints against Motorola Mobility (“Motorola”) with the International Trade Commission (“ITC”) and in U.S. District Court in Seattle for infringement of nine Microsoft patents by Motorola’s Android devices. Since then, Microsoft and Motorola have filed additional claims against each other in the ITC, in federal district courts in Seattle, Wisconsin, Florida, and California, and in courts in Germany and the United Kingdom. In April 2012, following complaints by Microsoft and Apple, the European Union’s competition office opened two antitrust investigations against Motorola to determine whether it has abused certain of its standard essential patents to distort competition in breach of European Union antitrust rules. In June 2012, we received a request for information from the U.S. Federal Trade Commission (“FTC”) apparently related to an FTC investigation into whether Motorola’s conduct violates U.S. law. The nature of the claims asserted and status of individual matters are summarized below.

International Trade Commission

The hearing in Microsoft’s ITC case against Motorola took place in August 2011 on seven of the nine patents originally asserted in the complaint. In December 2011, the administrative law judge (“ALJ”) issued an initial determination that Motorola infringed one Microsoft patent, and recommended that the ITC issue a limited exclusion order against Motorola prohibiting importation of infringing Motorola Android devices. In May 2012, the ITC issued the limited exclusion order recommended by the ALJ, which became effective on July 18, 2012. Microsoft has appealed certain aspects of the ITC ruling adverse to Microsoft and Motorola has appealed the ITC exclusion order.

In November 2010, Motorola filed an action against Microsoft in the ITC alleging infringement of five Motorola patents by Xbox consoles and accessories and seeking an exclusion order to prohibit importation of the allegedly infringing Xbox products into the U.S. In April 2012, the ALJ found that Xbox products infringe four of the five patents asserted by Motorola. The ALJ recommended that the ITC issue a limited exclusion order and a cease and desist order. Both Microsoft and Motorola sought ITC review of the ALJ’s findings. In June 2012, Microsoft filed a motion to terminate the investigation as to certain patents based on facts arising as the result of Google’s acquisition of Motorola. The ITC determined that it would review the ALJ’s initial determination in its entirety and remanded the matter to the ALJ (1) to apply certain ITC case precedent, (2) to rule on Microsoft’s June 2012 motion to terminate, and (3) set a new target date for completion of the investigation. The ALJ held a hearing in December 2012 and has set a target date for a final ITC ruling in July 2013. At Motorola’s request, the ITC has terminated its investigation as to four Motorola patents, leaving only one Motorola patent at issue before the ITC. In March 2013, the ALJ ruled that there has been no violation as to this last Motorola patent. Motorola is expected to seek ITC review of the ALJ’s determination. If the ITC rejects the ALJ’s ruling and issues an exclusion order or cease and desist order, it will be subject to Presidential review for up to 60 days, during which Microsoft may be able to import Xbox products subject to posting a bond. If an order is issued and survives Presidential review, Microsoft may be able to mitigate the order’s impact by altering Xbox products to avoid Motorola’s infringement claims.

U.S. District Court

The Seattle District Court case filed in October 2010 by Microsoft as a companion to Microsoft’s ITC case against Motorola has been stayed pending the outcome of Microsoft’s ITC case.

In November 2010, Microsoft sued Motorola for breach of contract in U.S. District Court in Seattle, alleging that Motorola breached its commitments to standards-setting organizations to license to Microsoft certain patents on reasonable and non-discriminatory (“RAND”) terms and conditions. Motorola has declared these patents essential to the implementation of the H.264 video standard and the 802.11 Wi-Fi standard. In suits described below, Motorola or

 

25


Table of Contents

PART I

Item 1

 

a Motorola affiliate subsequently sued Microsoft on those patents in U.S. District Courts, in the ITC, and in Germany. In February 2012, the Seattle District Court granted a partial summary judgment in favor of Microsoft ruling that (1) Motorola entered into binding contractual commitments with standards organizations committing to license its declared-essential patents on RAND terms and conditions; and (2) Microsoft is a third-party beneficiary of those commitments. The court rejected Motorola’s argument that Microsoft had repudiated its right to a RAND license, and ruled a trial is needed to determine whether Motorola is in breach of its obligation to enter into a patent license with Microsoft and, if so, the amount of the RAND royalty. In April 2012, the court issued a temporary restraining order preventing Motorola from taking steps to enforce an injunction in Germany relating to the H.264 video patents. In May 2012, the court converted that order into a preliminary injunction. Motorola appealed the court’s injunction orders to the Court of Appeals for the Ninth Circuit, which affirmed the orders in September 2012. The Seattle District Court held a trial in November 2012 to determine the RAND royalty for Motorola’s H.264 and 802.11 patents. In December 2012, the Seattle District Court ruled that Motorola could not obtain injunctive relief in connection with any of its claims for infringement of its H.264 and 802.11 patents. Trial of Microsoft’s breach of contract claim is set for August 26, 2013.

Cases filed by Motorola in Wisconsin, California, and Florida, with the exception of one currently stayed case in Wisconsin (a companion case to Motorola’s ITC action), have been transferred to the U.S District Court in Seattle. Motorola and Microsoft both seek damages as well as injunctive relief. No trial dates have been set in any of the transferred cases, and the court has stayed these cases on agreement of the parties.

 

   

In the transferred cases, Motorola asserts 15 patents are infringed by many Microsoft products including Windows Mobile 6.5 and Windows Phone 7, Windows Marketplace, Silverlight, Windows Vista and Windows 7, Exchange Server 2003 and later, Exchange ActiveSync, Windows Live Messenger, Lync Server 2010, Outlook 2010, Office 365, SQL Server, Internet Explorer 9, Xbox, and Kinect.

 

   

In the Motorola action originally filed in California, Motorola asserts that Microsoft violated antitrust laws in connection with Microsoft’s assertion of patents against Motorola that Microsoft has agreed to license to certain qualifying entities on RAND terms and conditions.

 

   

In counterclaims in the patent actions brought by Motorola, Microsoft asserts 14 patents are infringed by Motorola Android devices and certain Motorola digital video recorders.

Germany

In July 2011, Motorola filed patent infringement actions in Germany against Microsoft and several Microsoft subsidiaries.

 

   

Two of the patents are asserted by Motorola to be essential to implementation of the H.264 video standard, and Motorola alleges that H.264 capable products including Xbox 360, Windows 7, Media Player, and Internet Explorer infringe those patents. Motorola seeks damages and an injunction. In May 2012, the court issued an injunction relating to all H.264 capable Microsoft products in Germany. However, due to orders in the separate litigation pending in Seattle, Washington described above, Motorola is enjoined from taking steps to enforce the German injunction. Damages would be determined in later proceedings. Microsoft has appealed the rulings of the first instance court.

 

   

Motorola asserts one of the patents covers certain syncing functionality in the ActiveSync protocol employed by Windows Phone 7, Outlook Mobile, Hotmail Mobile, Exchange Online, Exchange Server, and Hotmail Server. Motorola seeks damages and an injunction. If the court rules in favor of Motorola, an injunction could be issued immediately relating to these products employing the ActiveSync protocol in Germany, which Motorola could then take steps to enforce. We expect the court to issue a ruling in April 2013. If Motorola prevails, damages would be determined in later proceedings.

 

   

Should injunction orders be issued and enforced by Motorola, Microsoft may be able to mitigate the adverse impact by altering its products to avoid Motorola’s infringement claims.

In lawsuits Microsoft filed in Germany in September, October, and December 2011 and in April 2012, Microsoft asserts Motorola Android devices infringe Microsoft patents. Microsoft seeks damages and an injunction. In May, July, and September 2012, courts in Germany issued injunctions on three patents against Motorola Android devices and in May and July ruled against Microsoft on two patents. Microsoft is taking steps to enforce the injunctions. Damages will be determined in later proceedings. Each party has appealed or is expected to appeal the rulings against it.

 

26


Table of Contents

PART I

Item 1

 

United Kingdom

In December 2011, Microsoft filed an action against Motorola in the High Court of Justice, Chancery Division, Patents Court, in London, England, seeking to revoke the UK part of the European patent asserted by Motorola in Germany against the ActiveSync protocol. In February 2012, Motorola counterclaimed alleging infringement of the patent and seeking damages and an injunction. A trial took place in December 2012, and the court ruled that Motorola’s patent is invalid and revoked. The court also ruled that the patent, even if valid, would be licensed under the grant-back clause in Google’s ActiveSync license. Motorola has appealed.

Other Patent and Intellectual Property Claims

In addition to these cases, there are approximately 65 other patent infringement cases pending against Microsoft.

Other

We also are subject to a variety of other claims and suits that arise from time to time in the ordinary course of our business. Although management currently believes that resolving claims against us, individually or in aggregate, will not have a material adverse impact on our financial statements, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future.

As of March 31, 2013, we had accrued aggregate liabilities of $419 million in other current liabilities and $176 million in other long-term liabilities for all of our legal matters that were contingencies as of that date. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $450 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact on our financial statements for the period in which the effects become reasonably estimable.

NOTE 15 — STOCKHOLDERS’ EQUITY

Share Repurchases

We repurchased the following shares of common stock through our repurchase program, during the periods presented:

 

(In millions)    Three Months Ended
March 31,
    Nine Months Ended
March 31,
 


     2013     2012     2013     2012  

Shares of common stock repurchased

     36        31        127        109   

Value of common stock repurchased

   $   1,000      $   1,000      $   3,607      $   3,000   


Excluded from this table are shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards. We repurchased all shares with cash resources. As of March 31, 2013, approximately $4.6 billion remained of our $40.0 billion repurchase program that we announced on September 22, 2008. The repurchase program expires September 30, 2013 but may be suspended or discontinued at any time without notice.

 

27


Table of Contents

PART I

Item 1

 

Dividends

Our Board of Directors declared the following dividends during the periods presented:

 

Declaration Date    Dividend
Per Share
    Record Date      Total Amount     Payment Date  


                  (in millions)        
Fiscal Year 2013                          

September 18, 2012

   $   0.23        November 15, 2012       $   1,933        December 13, 2012   

November 28, 2012

   $ 0.23        February 21, 2013       $ 1,925        March 14, 2013   

March 11, 2013

   $ 0.23        May 16, 2013       $ 1,920        June 13, 2013   
Fiscal Year 2012                          

September 20, 2011

   $ 0.20        November 17, 2011       $ 1,683        December 8, 2011   

December 14, 2011

   $ 0.20        February 16, 2012       $ 1,683        March 8, 2012   

March 13, 2012

   $ 0.20        May 17, 2012       $ 1,678        June 14, 2012   


The estimate of the amount to be paid as a result of the March 11, 2013 declaration was included in other current liabilities as of March 31, 2013.

NOTE 16 — SEGMENT INFORMATION

In its operation of the business, management, including our chief operating decision maker, the company’s Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with U.S. GAAP. The segment information within this note is reported on that basis. Our five segments are Windows Division, Server and Tools, Online Services Division, Microsoft Business Division, and Entertainment and Devices Division. During the three months ended December 31, 2012, we changed the name of our Windows & Windows Live Division to Windows Division.

Due to the integrated structure of our business, certain revenue earned and costs incurred by one segment may benefit other segments. Revenue on certain contracts may be allocated among the segments based on the relative value of the underlying products and services. Costs that are identifiable are allocated to the segments that benefit to incent cross-collaboration among our segments so that one segment is not solely burdened by the cost of a mutually beneficial activity. Allocated costs may include those relating to development and marketing of products and services from which multiple segments benefit, or those costs relating to services performed by one segment on behalf of other segments. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated.

In addition, certain costs incurred at a corporate level that are identifiable and that benefit our segments are allocated to them. These allocated costs include costs of: field selling; employee benefits; shared facilities services; and customer service and support. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated. Certain other corporate-level activity is not allocated to our segments, including costs of: broad-based sales and marketing; product support services; human resources; legal; finance; information technology; corporate development and procurement activities; research and development; legal settlements and contingencies; and employee severance.

We have recast certain prior period amounts within this note to conform to the way we internally managed and monitored segment performance during the current fiscal year, reflecting immaterial movements of business activities between segments and changes in cost allocations.

 

28


Table of Contents

PART I

Item 1

 

Segment revenue and operating income (loss) were as follows during the periods presented:

 

(In millions)    Three Months Ended
March 31,
    Nine Months Ended
March 31,
 


     2013     2012     2013     2012  

Revenue

                                

Windows Division

   $ 4,614      $ 4,614      $ 14,268      $ 14,166   

Server and Tools

     5,043        4,534        14,789        13,491   

Online Services Division

     851        725        2,457        2,181   

Microsoft Business Division

     6,130        5,838        18,304        17,752   

Entertainment and Devices Division

     2,145        1,612        8,233        7,819   

Unallocated and other

     1,706        84        (98     255   


Consolidated

   $   20,489      $   17,407      $   57,953      $   55,664   
    


 


 


 


Operating income (loss)

                                

Windows Division

   $ 2,369      $ 2,960      $ 7,849      $ 9,054   

Server and Tools

     1,981        1,692        5,855        5,214   

Online Services Division

     (263     (476     (904     (1,445

Microsoft Business Division

     3,911        3,792        12,112        11,667   

Entertainment and Devices Division

     (6     (232     944        642   

Reconciling amounts

     (380     (1,362     (5,165     (3,561


Consolidated

   $ 7,612      $ 6,374      $ 20,691      $ 21,571   
    


 


 


 


Reconciling amounts in the tables above and below include adjustments to conform our internal accounting policies to U.S. GAAP and corporate-level activity not specifically attributed to a segment. Significant internal accounting policies that differ from U.S. GAAP relate to revenue recognition, income statement classification, and depreciation.

Significant reconciling items were as follows:

 

(In millions)   

Three Months Ended

March 31,

   

Nine Months Ended

March 31,

 


     2013     2012     2013     2012