Edgar Filing: MICROSOFT CORP

Form 10-Q

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, 2015

¨	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 16, 2015


Common Stock, $0.00000625 par value per share		8,089,575,277 shares

MICROSOFT CORPORATION

FORM 10-Q

For the Quarter Ended March 31, 2015

INDEX


				Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		a)	Income Statements for the Three and Nine Months Ended March 31, 2015 and 2014		3

		b)	Comprehensive Income Statements for the Three and Nine Months Ended March 31, 2015 and 2014		4

		c)	Balance Sheets as of March 31, 2015 and June 30, 2014		5

		d)	Cash Flows Statements for the Three and Nine Months Ended March 31, 2015 and 2014		6

		e)	Stockholders’ Equity Statements for the Three and Nine Months Ended March 31, 2015 and 2014		7

		f)	Notes to Financial Statements		8

		g)	Report of Independent Registered Public Accounting Firm		33

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			34

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk			52

	Item 4.	Controls and Procedures			53

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings			53

	Item 1A.	Risk Factors			54

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			62

	Item 6.	Exhibits			63

SIGNATURE					64

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,


	2015			2014			2015		2014

Revenue	$	21,729		$	20,403		$	71,400	$	63,451
Cost of revenue		7,161			5,978			25,570		19,445

Gross margin		14,568			14,425			45,830		44,006
Research and development		2,984			2,743			8,952		8,258
Sales and marketing		3,709			3,542			11,752		11,129
General and administrative		1,091			1,166			3,339		3,342
Integration and restructuring		190			0			1,573		0

Operating income		6,594			6,974			20,214		21,277
Other income (expense), net		(77	)		(17	)		49		(34	)

Income before income taxes		6,517			6,957			20,263		21,243
Provision for income taxes		1,532			1,297			4,875		3,781

Net income	$	4,985		$	5,660		$	15,388	$	17,462


Earnings per share:
Basic	$	0.61		$	0.68		$	1.87	$	2.10
Diluted	$	0.61		$	0.68		$	1.86	$	2.08

Weighted average shares outstanding:
Basic		8,167			8,284			8,215		8,317
Diluted		8,237			8,367			8,293		8,411

Cash dividends declared per common share	$	0.31		$	0.28		$	0.93	$	0.84

See accompanying notes.

PART I

Item 1

COMPREHENSIVE INCOME STATEMENTS


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


	2015			2014			2015			2014

Net income	$	4,985		$	5,660		$	15,388		$	17,462

Other comprehensive income (loss):
Net unrealized gains (losses) on derivatives (net of tax effects of $21, $1, $31, and $(1))		401			(31	)		967			(14	)
Net unrealized gains (losses) on investments (net of tax effects of $68, $37, $(158), and $774)		125			68			(295	)		1,502
Translation adjustments and other (net of tax effects of $(174), $9, $(432), and $53)		(438	)		18			(909	)		101

Other comprehensive income (loss)		88			55			(237	)		1,589

Comprehensive income	$	5,073		$	5,715		$	15,151		$	19,051

See accompanying notes.

PART I

Item 1

BALANCE SHEETS


(In millions) (Unaudited)


	March 31, 2015		June 30, 2014

Assets
Current assets:
Cash and cash equivalents	$	7,414	$	8,669
Short-term investments (including securities loaned of $76 and $541)		88,024		77,040

Total cash, cash equivalents, and short-term investments		95,438		85,709
Accounts receivable, net of allowance for doubtful accounts of $268 and $301		12,427		19,544
Inventories		2,469		2,660
Deferred income taxes		1,688		1,941
Other		6,376		4,392

Total current assets		118,398		114,246
Property and equipment, net of accumulated depreciation of $16,839 and $14,793		14,375		13,011
Equity and other investments		12,019		14,597
Goodwill		21,728		20,127
Intangible assets, net		6,963		6,981
Other long-term assets		3,200		3,422

Total assets	$	176,683	$	172,384

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	6,690	$	7,432
Short-term debt		1,725		2,000
Current portion of long-term debt		2,499		0
Accrued compensation		3,902		4,797
Income taxes		758		782
Short-term unearned revenue		18,232		23,150
Securities lending payable		96		558
Other		6,846		6,906

Total current liabilities		40,748		45,625
Long-term debt		27,644		20,645
Long-term unearned revenue		1,966		2,008
Deferred income taxes		2,919		2,728
Other long-term liabilities		13,274		11,594

Total liabilities		86,551		82,600

Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital—shares authorized 24,000; outstanding 8,113 and 8,239		68,475		68,366
Retained earnings		18,186		17,710
Accumulated other comprehensive income		3,471		3,708

Total stockholders’ equity		90,132		89,784

Total liabilities and stockholders’ equity	$	176,683	$	172,384

See accompanying notes.

PART I

Item 1

CASH FLOWS STATEMENTS


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


	2015			2014			2015			2014

Operations
Net income	$	4,985		$	5,660		$	15,388		$	17,462
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other		1,515			1,255			4,464			3,470
Stock-based compensation expense		641			602			1,920			1,828
Net recognized losses (gains) on investments and derivatives		(55	)		(40	)		(179	)		100
Excess tax benefits from stock-based compensation		(31	)		(22	)		(555	)		(247	)
Deferred income taxes		253			(190	)		868			38
Deferral of unearned revenue		10,163			10,175			28,385			27,456
Recognition of unearned revenue		(11,209	)		(10,139	)		(33,347	)		(30,394	)
Changes in operating assets and liabilities:
Accounts receivable		3,655			2,501			6,904			4,243
Inventories		(430	)		(324	)		157			38
Other current assets		(111	)		340			(550	)		(311	)
Other long-term assets		(108	)		(73	)		341			(469	)
Accounts payable		(390	)		(716	)		(912	)		(390	)
Other current liabilities		200			870			(1,952	)		3
Other long-term liabilities		492			200			1,332			(110	)

Net cash from operations		9,570			10,099			22,264			22,717

Financing
(Repayments) proceeds from issuance of short-term debt, maturities of 90 days or less, net		(6,575	)		0			1,222			0
Proceeds from issuance of debt		10,680			0			10,680			8,850
Repayments of debt		0			(300	)		(1,500	)		(1,888	)
Common stock issued		146			141			483			461
Common stock repurchased		(5,131	)		(1,845	)		(10,164	)		(6,146	)
Common stock cash dividends paid		(2,532	)		(2,322	)		(7,386	)		(6,570	)
Excess tax benefits from stock-based compensation		31			22			555			247
Other		316			0			601			(39	)

Net cash used in financing		(3,065	)		(4,304	)		(5,509	)		(5,085	)

Investing
Additions to property and equipment		(1,391	)		(1,192	)		(4,163	)		(4,155	)
Acquisition of companies, net of cash acquired, and purchases of intangible and other assets		(162	)		(157	)		(3,097	)		(311	)
Purchases of investments		(30,218	)		(21,323	)		(73,470	)		(49,217	)
Maturities of investments		5,561			2,336			9,643			4,134
Sales of investments		21,063			16,006			53,616			39,477
Securities lending payable		(334	)		46			(463	)		149

Net cash used in investing		(5,481	)		(4,284	)		(17,934	)		(9,923	)

Effect of foreign exchange rates on cash and cash equivalents		(36	)		2			(76	)		59

Net change in cash and cash equivalents		988			1,513			(1,255	)		7,768
Cash and cash equivalents, beginning of period		6,426			10,059			8,669			3,804

Cash and cash equivalents, end of period	$	7,414		$	11,572		$	7,414		$	11,572

See accompanying notes.

PART I

Item 1

STOCKHOLDERS’ EQUITY STATEMENTS


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


	2015			2014			2015			2014

Common stock and paid-in capital
Balance, beginning of period	$	68,765		$	67,476		$	68,366		$	67,306
Common stock issued		146			141			483			461
Common stock repurchased		(1,109	)		(438	)		(2,853	)		(2,045	)
Stock-based compensation expense		641			602			1,920			1,828
Stock-based compensation income tax benefits		30			22			555			248
Other, net		2			0			4			5

Balance, end of period		68,475			67,803			68,475			67,803

Retained earnings
Balance, beginning of period		19,731			14,347			17,710			9,895
Net income		4,985			5,660			15,388			17,462
Common stock cash dividends		(2,499	)		(2,311	)		(7,592	)		(6,967	)
Common stock repurchased		(4,031	)		(1,407	)		(7,320	)		(4,101	)

Balance, end of period		18,186			16,289			18,186			16,289

Accumulated other comprehensive income
Balance, beginning of period		3,383			3,277			3,708			1,743
Other comprehensive income (loss)		88			55			(237	)		1,589

Balance, end of period		3,471			3,332			3,471			3,332

Total stockholders’ equity	$	90,132		$	87,424		$	90,132		$	87,424

See accompanying notes.

PART I

Item 1

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 — ACCOUNTING POLICIES

Accounting Principles

We prepare our unaudited interim consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Microsoft Corporation 2014 Form 10-K filed with the U.S. Securities and Exchange Commission on July 31, 2014.

We have recast certain prior period amounts to conform to the current period presentation, with no impact on consolidated net income or cash flows.

Principles of Consolidation

The consolidated financial statements include the accounts of Microsoft Corporation and its subsidiaries. Intercompany transactions and balances have been eliminated. Equity investments through which we are able to 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 consolidated 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.

Recent Accounting Guidance

Recent accounting guidance not yet adopted

In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards, the Financial Accounting Standards Board (“FASB”) issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will be effective for us beginning July 1, 2017, and early adoption is not permitted. We anticipate this standard will have a material impact on our consolidated financial statements, and we are currently evaluating its impact.

In April 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This new guidance will be effective for us beginning July 1, 2016. We are currently evaluating the impact of this standard on our consolidated financial statements.

PART I

Item 1

NOTE 2 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and stock awards.

The components of basic and diluted EPS are as follows:


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


	2015		2014		2015		2014

Net income available for common shareholders (A)	$	4,985	$	5,660	$	15,388	$	17,462


Weighted average outstanding shares of common stock (B)		8,167		8,284		8,215		8,317
Dilutive effect of stock-based awards		70		83		78		94

Common stock and common stock equivalents (C)		8,237		8,367		8,293		8,411


Earnings Per Share

Basic (A/B)	$	0.61	$	0.68	$	1.87	$	2.10
Diluted (A/C)	$	0.61	$	0.68	$	1.86	$	2.08

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

NOTE 3 — OTHER INCOME (EXPENSE), NET

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


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


	2015			2014			2015			2014

Dividends and interest income	$	160		$	220		$	568		$	618
Interest expense		(211	)		(175	)		(534	)		(428	)
Net recognized gains on investments		169			90			565			153
Net losses on derivatives		(114	)		(50	)		(386	)		(253	)
Net gains (losses) on foreign currency remeasurements		(54	)		(30	)		107			(21	)
Other		(27	)		(72	)		(271	)		(103	)

Total	$	(77	)	$	(17	)	$	49		$	(34	)

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


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


	2015			2014			2015			2014

Other-than-temporary impairments of investments	$	(95	)	$	(16	)	$	(130	)	$	(82	)
Realized gains from sales of available-for-sale securities		358			164			897			422
Realized losses from sales of available-for-sale securities		(94	)		(58	)		(202	)		(187	)

Total	$	169		$	90		$	565		$	153

PART I

Item 1

NOTE 4 — INVESTMENTS

Investment Components

The components of investments, including associated derivatives but excluding held-to-maturity investments, 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, 2015

Cash	$	4,346	$	0	$	0		$	4,346	$	4,346	$	0	$	0
Mutual funds		1,113		0		0			1,113		1,113		0		0
Commercial paper		53		0		0			53		53		0		0
Certificates of deposit		896		0		0			896		777		119		0
U.S. government and agency securities		73,946		78		(18	)		74,006		1,125		72,881		0
Foreign government bonds		5,450		5		(24	)		5,431		0		5,431		0
Mortgage- and asset-backed securities		2,985		30		(2	)		3,013		0		3,013		0
Corporate notes and bonds		6,105		144		(25	)		6,224		0		6,224		0
Municipal securities		284		55		0			339		0		339		0
Common and preferred stock		6,651		5,042		(259	)		11,434		0		0		11,434
Other investments		577		0		0			577		0		17		560

Total	$	102,406	$	5,354	$	(328	)	$	107,432	$	7,414	$	88,024	$	11,994


(In millions)	Cost Basis		Unrealized Gains		Unrealized Losses			Recorded Basis		Cash and Cash Equivalents		Short-term Investments		Equity and Other Investments


June 30, 2014

Cash	$	4,980	$	0	$	0		$	4,980	$	4,980	$	0	$	0
Mutual funds		590		0		0			590		590		0		0
Commercial paper		189		0		0			189		89		100		0
Certificates of deposit		1,197		0		0			1,197		865		332		0
U.S. government and agency securities		66,952		103		(29	)		67,026		109		66,917		0
Foreign government bonds		3,328		17		(10	)		3,335		2,027		1,308		0
Mortgage- and asset-backed securities		1,048		31		(2	)		1,077		0		1,077		0
Corporate notes and bonds		6,788		190		(9	)		6,969		9		6,960		0
Municipal securities		287		45		0			332		0		332		0
Common and preferred stock		6,785		5,207		(81	)		11,911		0		0		11,911
Other investments		1,164		0		0			1,164		0		14		1,150

Total	$	93,308	$	5,593	$	(131	)	$	98,770	$	8,669	$	77,040	$	13,061

In addition to the investments in the table above, we also own corporate notes that are classified as held-to-maturity investments which are included in equity and other investments on the balance sheet. These corporate notes are due October 31, 2023 and are measured at fair value on a nonrecurring basis. As of March 31, 2015, the amortized cost and recorded basis of these corporate notes were both $25 million with an estimated fair value that approximates the carrying value. As of June 30, 2014, the amortized cost, recorded basis, and estimated fair value of these corporate notes was $1.5 billion, $1.5 billion, and $1.7 billion, respectively, while their associated gross unrealized holding gains were $164 million.

As of March 31, 2015 and June 30, 2014, the recorded bases of common and preferred stock that are restricted for more than one year or are not publicly traded were $538 million and $520 million, respectively. These investments are carried at cost and are reviewed quarterly for indicators of other-than-temporary impairment. It is not practicable for us to reliably estimate the fair value of these investments.

PART I

Item 1

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, 2015

U.S. government and agency securities	$	8,047	$	(3	)	$	422	$	(15	)	$	8,469	$	(18	)
Foreign government bonds		5,124		(11	)		20		(13	)		5,144		(24	)
Mortgage- and asset-backed securities		1,500		(1	)		30		(1	)		1,530		(2	)
Corporate notes and bonds		1,662		(21	)		51		(4	)		1,713		(25	)
Common and preferred stock		1,217		(224	)		145		(35	)		1,362		(259	)

Total	$	17,550	$	(260	)	$	668	$	(68	)	$	18,218	$	(328	)


	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, 2014

U.S. government and agency securities	$	4,161	$	(29	)	$	850	$	0		$	5,011	$	(29	)
Foreign government bonds		566		(4	)		21		(6	)		587		(10	)
Mortgage- and asset-backed securities		120		0			61		(2	)		181		(2	)
Corporate notes and bonds		1,154		(8	)		34		(1	)		1,188		(9	)
Common and preferred stock		463		(48	)		257		(33	)		720		(81	)

Total	$	6,464	$	(89	)	$	1,223	$	(42	)	$	7,687	$	(131	)

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, 2015.

Debt Investment Maturities


(In millions)	Cost Basis		Estimated Fair Value


March 31, 2015

Due in one year or less	$	37,613	$	37,630
Due after one year through five years		48,356		48,462
Due after five years through 10 years		2,232		2,266
Due after 10 years		1,518		1,604

Total	$	89,719	$	89,962

NOTE 5 — DERIVATIVES

We use derivative instruments to manage risks related to foreign currencies, equity prices, interest rates, and credit; to enhance investment returns; and to 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. dollar equivalents.

PART I

Item 1

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, 2015 and June 30, 2014, the total notional amounts of these foreign exchange contracts sold were $9.4 billion and $4.9 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, 2015 and June 30, 2014, the total notional amounts of these foreign exchange contracts sold were $5.3 billion and $3.1 billion, respectively.

Certain options and forwards not designated as hedging instruments are also used to manage the variability in foreign exchange rates on certain balance sheet amounts and to manage other foreign currency exposures. As of March 31, 2015, the total notional amounts of these foreign exchange contracts purchased and sold were $10.3 billion and $6.8 billion, respectively. As of June 30, 2014, the total notional amounts of these foreign exchange contracts purchased and sold were $6.2 billion and $8.5 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, 2015, the total notional amounts of equity contracts purchased and sold for managing market price risk were $1.8 billion and $2.6 billion, respectively, of which $590 million and $755 million, respectively, were designated as hedging instruments. As of June 30, 2014, the total notional amounts of equity contracts purchased and sold for managing market price risk were $1.9 billion and $1.9 billion, respectively, of which $362 million and $420 million, respectively, were designated as hedging instruments.

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, 2015, the total notional amounts of fixed-interest rate contracts purchased and sold were $2.1 billion and $2.8 billion, respectively. As of June 30, 2014, the total notional amounts of fixed-interest rate contracts purchased and sold were $1.7 billion and $936 million, 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, 2015 and June 30, 2014, the total notional derivative amounts of mortgage contracts purchased were $813 million 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, 2015, the total notional amounts of credit contracts purchased and sold were $628 million and $417 million, respectively. As of June 30, 2014, the total notional amounts of credit contracts purchased and sold were $550 million and $440 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

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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, 2015, the total notional amounts of commodity contracts purchased and sold were $1.0 billion and $317 million, respectively. As of June 30, 2014, the total notional amounts of commodity contracts purchased and sold were $1.4 billion and $408 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, 2015, 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 other comprehensive income (“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.

For derivative instruments that are not designated as hedges, gains (losses) from changes in fair values are primarily recognized in other income (expense), net. 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 and gains (losses) from foreign exchange rate changes on certain balance sheet amounts.

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The following table presents the 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:


	March 31, 2015												June 30, 2014

	Assets									Liabilities			Assets									Liabilities

(In millions)	Short-term Investments			Other Current Assets			Equity and Other Investments			Other Current Liabilities			Short-term Investments			Other Current Assets			Equity and Other Investments			Other Current Liabilities


Non-designated Hedge Derivatives

Foreign exchange contracts	$	41		$	139		$	0		$	(354	)	$	10		$	39		$	0		$	(97	)
Equity contracts		156			0			0			(32	)		177			0			0			(21	)
Interest rate contracts		8			0			0			(20	)		17			0			0			(12	)
Credit contracts		18			0			0			(9	)		24			0			0			(13	)
Commodity contracts		0			0			0			0			15			0			0			(1	)

Total	$	223		$	139		$	0		$	(415	)	$	243		$	39		$	0		$	(144	)


Designated Hedge Derivatives

Foreign exchange contracts	$	59		$	936		$	0		$	(11	)	$	1		$	70		$	0		$	(15	)
Equity contracts		0			0			38			(76	)		0			0			7			(125	)

Total	$	59		$	936		$	38		$	(87	)	$	1		$	70		$	7		$	(140	)

Total gross amounts of derivatives	$	282		$	1,075		$	38		$	(502	)	$	244		$	109		$	7		$	(284	)

Gross derivatives either offset or subject to an enforceable master netting agreement	$	159		$	1,075		$	38		$	(502	)	$	99		$	109		$	7		$	(284	)
Gross amounts of derivatives offset in the balance sheet		(85	)		(249	)		(38	)		372			(77	)		(71	)		(7	)		155

Net amounts presented in the balance sheet		74			826			0			(130	)		22			38			0			(129	)
Gross amounts of derivatives not offset in the balance sheet		0			0			0			0			0			0			0			0
Cash collateral received		0			0			0			(695	)		0			0			0			0

Net amount	$	74		$	826		$	0		$	(825	)	$	22		$	38		$	0		$	(129	)

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

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Fair-Value Hedge Gains (Losses)

We recognized in other income (expense), net 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,


	2015			2014			2015			2014

Foreign Exchange Contracts

Derivatives	$	31		$	(51	)	$	653		$	8
Hedged items		(23	)		48			(647	)		(13	)

Total amount of ineffectiveness	$	8		$	(3	)	$	6		$	(5	)


Equity Contracts

Derivatives	$	(25	)	$	(44	)	$	(88	)	$	(54	)
Hedged items		25			44			88			54

Total amount of ineffectiveness	$	0		$	0		$	0		$	0


Amount of equity contracts excluded from effectiveness assessment	$	5		$	7		$	(8	)	$	(19	)

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,


	2015			2014			2015			2014

Effective Portion

Gains (losses) recognized in OCI (net of tax effects of $25, $3, $37, and $3)	$	559		$	(2	)	$	1,251		$	57
Gains reclassified from AOCI into revenue	$	162		$	31		$	290		$	75

Amount Excluded from Effectiveness Assessment and Ineffective Portion

Losses recognized in other income (expense), net	$	(120	)	$	(53	)	$	(262	)	$	(173	)

We estimate that $767 million of net derivative gains included in accumulated other comprehensive income (“AOCI”) at March 31, 2015 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, 2015.

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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), net. 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), net, 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 and gains (losses) from foreign exchange rate changes on certain balance sheet amounts.


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


	2015			2014			2015			2014

Foreign exchange contracts	$	(442	)	$	(68	)	$	(647	)	$	6
Equity contracts		(4	)		(6	)		(18	)		(52	)
Interest-rate contracts		3			12			21			12
Credit contracts		2			0			(2	)		3
Commodity contracts		(47	)		64			(264	)		75

Total	$	(488	)	$	2		$	(910	)	$	44

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, credit spreads, 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, common and preferred stock, mortgage-backed and asset-backed securities, U.S. government and agency securities, and foreign government bonds. 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 common and preferred stock and goodwill when it is recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. Our Level 3 derivative assets and liabilities primarily include equity derivatives.

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.

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

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, 2015

Assets

Mutual funds	$	1,113	$	0	$	0	$	1,113	$	0		$	1,113
Commercial paper		0		53		0		53		0			53
Certificates of deposit		0		896		0		896		0			896
U.S. government and agency securities		72,611		1,392		0		74,003		0			74,003
Foreign government bonds		124		5,252		0		5,376		0			5,376
Mortgage- and asset-backed securities		0		3,008		0		3,008		0			3,008
Corporate notes and bonds		0		6,102		0		6,102		0			6,102
Municipal securities		0		339		0		339		0			339
Common and preferred stock		8,701		2,179		14		10,894		0			10,894
Derivatives		2		1,362		31		1,395		(372	)		1,023

Total	$	82,551	$	20,583	$	45	$	103,179	$	(372	)	$	102,807


Liabilities

Derivatives and other	$	14	$	416	$	72	$	502	$	(372	)	$	130



(In millions)		Level 1		Level 2		Level 3		Gross Fair Value		Netting	^(a)		Net Fair Value


June 30, 2014

Assets

Mutual funds	$	590	$	0	$	0	$	590	$	0		$	590
Commercial paper		0		189		0		189		0			189
Certificates of deposit		0		1,197		0		1,197		0			1,197
U.S. government and agency securities		66,288		745		0		67,033		0			67,033
Foreign government bonds		139		3,210		0		3,349		0			3,349
Mortgage- and asset-backed securities		0		1,073		0		1,073		0			1,073
Corporate notes and bonds		0		6,805		0		6,805		0			6,805
Municipal securities		0		332		0		332		0			332
Common and preferred stock		9,552		1,825		14		11,391		0			11,391
Derivatives		5		348		7		360		(155	)		205

Total	$	76,574	$	15,724	$	21	$	92,319	$	(155	)	$	92,164


Liabilities

Derivatives and other	$	5	$	153	$	126	$	284	$	(155	)	$	129

(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 changes in our Level 3 financial instruments that are measured at fair value on a recurring basis were immaterial during the periods presented.

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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.


(In millions)


March 31, 2015				June 30, 2014

Net fair value of assets measured at fair value on a recurring basis	$	102,807		$	92,164
Cash		4,346			4,980
Common and preferred stock measured at fair value on a nonrecurring basis		538			520
Other investments measured at fair value on a nonrecurring basis		560			1,150
Less derivative net assets classified as other current assets		(826	)		(38	)
Other		7			(6	)

Recorded basis of investment components	$	107,432		$	98,770

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

During the three and nine months ended March 31, 2015 and 2014, 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, 2015			June 30, 2014

Raw materials	$	1,019	$	944
Work in process		293		266
Finished goods		1,157		1,450

Total	$	2,469	$	2,660

NOTE 8 — BUSINESS COMBINATIONS

Nokia’s Devices and Services Business

On April 25, 2014, we acquired substantially all of Nokia Corporation’s (“Nokia”) Devices and Services business (“NDS”) for a total purchase price of $9.4 billion, including cash acquired of $1.5 billion (the “Acquisition”). The purchase price consisted primarily of cash of $7.1 billion, Nokia’s repurchase of convertible notes of $2.1 billion, which was a non-cash transaction, and liabilities assumed of $0.2 billion. The Acquisition is expected to accelerate the growth of our Devices and Consumer (“D&C”) business through faster innovation, synergies, and unified branding and marketing.

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The allocation of the purchase price to goodwill was completed as of March 31, 2015. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:


(In millions)


Cash	$	1,506
Accounts receivable ^(a)		754
Inventories		544
Other current assets		936
Property and equipment		981
Intangible assets		4,509
Goodwill ^(b)		5,456
Other		221
Current liabilities		(4,575	)
Long-term liabilities		(890	)

Total purchase price	$	9,442

(a)	Gross accounts receivable was $901 million, of which $147 million was expected to be uncollectible.

(b)	Goodwill was assigned to our Phone Hardware segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of NDS.

Mojang Synergies AB

On November 6, 2014, we acquired Mojang Synergies AB (“Mojang”), the Swedish video game developer of the Minecraft gaming franchise, for $2.5 billion in cash, net of cash acquired. The addition of Minecraft and its community enhances our gaming portfolio across Windows, Xbox, and other ecosystems and devices outside our own. Our purchase price allocation is preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets and liabilities becomes available, including additional information relating to tax matters and finalization of our valuation of identified intangible assets.

The significant classes of assets and liabilities to which we preliminarily allocated the purchase price were goodwill of $1.8 billion and identifiable intangible assets of $928 million, primarily marketing-related (trade names). The goodwill recognized in connection with the acquisition is primarily attributable to anticipated synergies from future growth, and is not expected to be deductible for tax purposes. We assigned the goodwill to our D&C Other segment. Identifiable intangible assets were assigned a total weighted-average amortization period of 6.3 years. Mojang has been included in our consolidated results of operations since the acquisition date.

Other

During the nine months ended March 31, 2015, we completed 10 additional acquisitions for total cash consideration of $556 million. These entities have been included in our consolidated results of operations since their respective acquisition dates.

Pro forma results of operations for Mojang and our other acquisitions during the current period have not been presented because the effects of these business combinations, individually and in aggregate, were not material to our consolidated results of operations.

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NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:


(In millions)		June 30, 2014		Acquisitions			Other			March 31, 2015


Devices and Consumer	Licensing	$	868		$	4	$	0			$	872

	Hardware:
	Computing and Gaming Hardware		1,698			0		(56	)			1,642
	Phone Hardware		5,354			0		(113	)			5,241

	Total Devices and Consumer Hardware		7,052			0		(169	)			6,883
	Other		738			1,772		(245	)			2,265

	Total Devices and Consumer		8,658			1,776		(414	)			10,020


Commercial	Licensing		10,058			0		(180	)			9,878
	Other		1,411			430		(11	)			1,830

	Total Commercial		11,469			430		(191	)			11,708

Total goodwill		$	20,127		$	2,206	$	(605	)		$	21,728

The measurement periods for the valuation of assets acquired and liabilities assumed end as soon as information on the facts and circumstances that existed as of the acquisition dates 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 and purchase accounting adjustments are presented as “Other” in the above table.

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, 2015								June 30, 2014

Technology-based ^(a)	$	6,976		$	(3,252	)	$	3,724	$	6,440		$	(2,615	)	$	3,825
Marketing-related		1,984			(488	)		1,496		1,518			(324	)		1,194
Contract-based		2,265			(838	)		1,427		2,266			(716	)		1,550
Customer-related		769			(453	)		316		732			(320	)		412

Total	$	11,994		$	(5,031	)	$	6,963	$	10,956		$	(3,975	)	$	6,981

(a)	Technology-based intangible assets included $29 million and $98 million as of March 31, 2015 and June 30, 2014, respectively, of net carrying amount of software to be sold, leased, or otherwise marketed.

Intangible assets amortization expense was $361 million and $1.1 billion for the three and nine months ended March 31, 2015, respectively, and $170 million and $498 million for the three and nine months ended March 31, 2014, respectively. Amortization of capitalized software was $13 million and $68 million for the three and nine months ended March 31, 2015, respectively, and $50 million and $146 million for the three and nine months ended March 31, 2014, respectively.

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The following table outlines the estimated future amortization expense related to intangible assets held at March 31, 2015:


(In millions)


Year Ending June 30,

2015 (excluding the nine months ended March 31, 2015)	$	333
2016		1,227
2017		984
2018		837
2019		756
Thereafter		2,826

Total	$	6,963

NOTE 11 — DEBT

As of March 31, 2015, we had $31.8 billion of issued and outstanding debt, comprising $1.7 billion of short-term debt and $30.1 billion of long-term debt, including the current portion. As of June 30, 2014, we had $22.6 billion of issued and outstanding debt, comprising $2.0 billion of short-term debt and $20.6 billion of long-term debt.

Short-term Debt

As of March 31, 2015, we had $1.7 billion of commercial paper issued and outstanding, with a weighted-average interest rate of 0.12% and maturities ranging from 58 to 85 days. As of June 30, 2014, we had $2.0 billion of commercial paper issued and outstanding, with a weighted-average interest rate of 0.12% and maturities ranging from 86 to 91 days. The estimated fair value of this commercial paper approximates its carrying value.

We have two $5.0 billion credit facilities which expire on November 4, 2015 and November 14, 2018, respectively. These credit facilities serve as a back-up for our commercial paper program. As of March 31, 2015, we were in compliance with the only financial covenant in both credit agreements, which requires us to maintain a coverage ratio of at least three times earnings before interest, taxes, depreciation, and amortization to interest expense, as defined in the credit agreements. No amounts were drawn against these credit facilities during any of the periods presented.

Long-term Debt

As of March 31, 2015, the total carrying value and estimated fair value of our long-term debt, including the current portion, were $30.1 billion and $32.1 billion, respectively. This is compared to a carrying value and estimated fair value of our long-term debt of $20.6 billion and $21.5 billion, respectively, as of June 30, 2014. These estimated fair values are based on Level 2 inputs.

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The components of our long-term debt, including the current portion, and the associated interest rates were as follows as of March 31, 2015 and June 30, 2014:

Due Date

Face Value

March 31,
2015

Face Value

June 30,
2014

Stated
Interest

Rate

Effective
Interest

Rate

(In millions)

Notes

September 25, 2015

1,750

1,750

1.625%

1.795%

February 8, 2016

750

750

2.500%

2.642%

November 15, 2017

600

600

0.875%

1.084%

May 1, 2018

450

450

1.000%

1.106%

December 6, 2018

1,250

1,250

1.625%

1.824%

June 1, 2019

1,000

1,000

4.200%

4.379%

February 12, 2020 ^(a)

1,500

1.850%

1.935%

October 1, 2020

1,000

1,000

3.000%

3.137%

February 8, 2021

500

500

4.000%

4.082%

December 6, 2021 ^(b)

1,880

2,396

2.125%

2.233%

February 12, 2022 ^(a)

1,500

2.375%

2.466%

November 15, 2022

750

750

2.125%

2.239%

May 1, 2023

1,000

1,000

2.375%

2.465%

December 15, 2023

1,500

1,500

3.625%

3.726%

February 12, 2025 ^(a)

2,250

2.700%

2.772%

December 6, 2028 ^(b)

1,880

2,396

3.125%

3.218%

May 2, 2033 ^(b)

590

753

2.625%

2.690%

February 12, 2035 ^(a)

1,500

3.500%

3.604%

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

900

900

3.500%

3.571%

May 1, 2043

500

500

3.750%

3.829%

December 15, 2043

500

500

4.875%

4.918%

February 12, 2045 ^(a)

1,750

3.750%

3.800%

February 12, 2055 ^(a)

2,250

4.000%

4.063%

Total

30,300

20,745

(a)	In February 2015, we issued $10.8 billion of debt securities.

(b)	Euro-denominated debt securities.

The notes in the table above are senior unsecured obligations and rank equally with our other senior unsecured debt outstanding. Interest on these notes is paid semi-annually, except for the euro-denominated debt securities on which interest is paid annually. As of March 31, 2015 and June 30, 2014, the aggregate unamortized discount for our long-term debt, including the current portion, was $157 million and $100 million, respectively.

NOTE 12 — INCOME TAXES

Our effective tax rate for the three months ended March 31, 2015 and 2014 was 24% and 19%, respectively, and 24% and 18% for the nine months ended March 31, 2015 and 2014, 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.

Tax contingencies and other tax liabilities were $11.8 billion and $10.4 billion as of March 31, 2015 and June 30, 2014, respectively, and are included in other long-term liabilities. This increase relates primarily to current period quarterly growth relating to intercompany transfer pricing adjustments. While we settled a portion of the Internal Revenue Service (“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

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the audit phase of the examination. As of March 31, 2015, the primary unresolved issue relates to transfer pricing which could have a significant adverse impact on our consolidated financial statements if it is not resolved favorably. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved issues and do not expect a final resolution of these issues in the next 12 months. Based on the information currently available, we do not anticipate a significant increase or decrease to our income tax contingencies for these issues within the next 12 months. We also continue to be subject to examination by the I.R.S. for tax years 2007 to 2014.

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 2014, some of which are currently under audit by local tax authorities. Resolution of these audits are not expected to be material to our consolidated financial statements.

NOTE 13 — RESTRUCTURING CHARGES

In July 2014, we announced a restructuring plan to simplify our organization and align NDS with our company’s overall strategy (the “Restructuring Plan”). Pursuant to the Restructuring Plan, we planned to eliminate up to 18,000 positions in the current fiscal year, including approximately 12,500 professional and factory positions related to the NDS business. The actions associated with the Restructuring Plan are expected to be completed by June 30, 2015.

We incurred restructuring charges of $98 million and $1.3 billion during the three and nine months ended March 31, 2015, respectively, including severance expenses and other reorganization costs, primarily associated with our facilities consolidation. As of March 31, 2015, we have notified approximately 18,000 employees of their job elimination, entered into mutually agreed separations, or commenced required consultation processes, and recognized substantially all anticipated severance charges for the positions expected to be eliminated under the Restructuring Plan. We also wrote down the carrying value of certain assets and recognized a restructuring charge relating to the write downs of $24 million and $333 million during the three and nine months ended March 31, 2015, respectively. Restructuring charges were included in integration and restructuring expenses in our consolidated income statement, and reflected in Corporate and Other in our table of operating income (loss) by segment group in Note 18 – Segment Information.

During the remainder of fiscal year 2015, we expect to incur additional pre-tax restructuring charges of approximately $100 million, primarily related to asset write-downs and lease termination costs.

Changes in the restructuring liability were as follows:



(In millions)		Severance			Asset Impairments and Other	^(a)		Total


Restructuring liability as of June 30, 2014	$	0		$	0		$	0
Restructuring charges		783			495			1,278
Cash paid		(651	)		(101	)		(752	)
Other		(19	)		(348	)		(367	)

Restructuring liability as of March 31, 2015	$	113		$	46		$	159

(a)	“Asset Impairments and Other” primarily reflects activities associated with the consolidation of our facilities and manufacturing operations, including asset write-downs of $333 million during the nine months ended March 31, 2015, as well as contract termination costs.

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NOTE 14 — UNEARNED REVENUE

Unearned revenue by segment was as follows, with segments with significant balances shown separately:


(In millions)


	March 31, 2015		June 30, 2014

Commercial Licensing	$	14,697	$	19,099
Commercial Other		3,526		3,934
Rest of the segments		1,975		2,125

Total	$	20,198	$	25,158

NOTE 15 — 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. 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 that 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. We estimate the total remaining cost of the settlements is approximately $200 million, all of which had been accrued as of March 31, 2015.

Three similar 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. After the British Columbia Court of Appeal dismissed the case, in October 2013 the Canadian Supreme Court reversed the appellate court and reinstated part of the British Columbia case, which is now scheduled for trial in 2016. The other two cases are inactive.

Other Antitrust Litigation and Claims

GO Computer litigation

In June 2005, GO Computer Inc. and co-founder Jerry Kaplan filed a complaint in California state court asserting antitrust claims under the Cartwright Act related to the business of the former GO Corporation in the early 1990s and its successor in interest, Lucent Corporation in the early 2000s. All claims prior to June 2001 have been dismissed with prejudice as barred by the statute of limitations. The case is moving forward with discovery, and a trial is set for September 2015.

China State Administration for Industry and Commerce investigation

On July 28, 2014, Microsoft was informed that China’s State Administration for Industry and Commerce (“SAIC”) had begun a formal investigation relating to China’s Anti-Monopoly Law, and the SAIC conducted onsite inspections of Microsoft offices in Beijing, Shanghai, Guangzhou, and Chengdu. SAIC has stated the investigation relates to compatibility, bundle sales, and file verification issues related to Windows and Office software.

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 with the ITC, in federal district courts in Seattle, Wisconsin, Florida, and California, and in courts in Germany. The nature of the claims asserted and status of individual matters are summarized below.

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International Trade Commission

In May 2012, the ITC issued a limited exclusion order against Motorola on one Microsoft patent, which became effective in July 2012 and was affirmed on appeal in December 2013. In July 2013, Microsoft filed an action in U.S. District Court in Washington, D.C. seeking an order to compel enforcement of the ITC’s May 2012 import ban against infringing Motorola products by the Bureau of Customs and Border Protection (“CBP”), after learning that CBP had failed to fully enforce the order.

In November 2010, Motorola filed an action against Microsoft with 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. At Motorola’s request, the ITC terminated its investigation of four Motorola patents. In March 2013, the ITC affirmed there was no violation of the remaining Motorola patent. Motorola appealed the ITC’s decision to the U.S. Court of Appeals for the Federal Circuit.

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 was stayed pending the outcome of the 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 the Motorola ITC case described above and in suits described below, Motorola or 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 had committed to standards organizations to license its declared-essential patents on RAND terms and conditions; and (2) Microsoft is a third-party beneficiary of those commitments. After trial, the Seattle District Court set per unit royalties for Motorola’s H.264 and 802.11 patents, which resulted in an immaterial Microsoft liability. In September 2013, following trial of Microsoft’s breach of contract claim, a jury awarded $14.5 million in damages to Microsoft. Motorola appealed.

Cases filed by Motorola in Wisconsin, California, and Florida, with the exception of one case in Wisconsin initially stayed and later dismissed without prejudice (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. The court has stayed these cases in Seattle on agreement of the parties.

•

In the transferred cases, Motorola asserts 15 patents are infringed by a range of Microsoft products including mobile and PC operating system, productivity, server, communication, browser and gaming products.

•

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

•

In counterclaims, 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.

•

Motorola asserts two patents (both now expired) are 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. In May 2012, the court issued an injunction relating to all H.264 capable Microsoft products in Germany, which Microsoft appealed. Orders in the litigation pending in Seattle, Washington described above enjoin Motorola from enforcing the German injunction.

•

Motorola asserts that one patent covers certain syncing functionality in the ActiveSync protocol employed by Windows Phone 7, Outlook Mobile, Hotmail Mobile, Exchange Online, Exchange Server, and Hotmail Server. In April 2013, the court stayed the case pending the outcome of parallel proceedings in which Microsoft is seeking to invalidate the patent. In November 2013, the Federal Patent Court invalidated the

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originally issued patent claims, but ruled that certain new amended claims were patentable. Both Motorola and Microsoft appealed. In June 2014, the court reopened infringement proceedings, which are currently stayed.

•

Microsoft may be able to mitigate the adverse impact of any injunction by altering its products to avoid Motorola’s infringement claims.

•

Any damages would be determined in separate proceedings.

In lawsuits Microsoft filed in Germany in 2011 and 2012, Microsoft asserts that Motorola Android devices infringe Microsoft patents and is seeking damages and injunctions. In 2012, regional courts in Germany issued injunctions on three of the Microsoft patents, which Motorola appealed. One judgment has been affirmed on appeal (and Motorola has further appealed), and the other two appeals are pending (in one of these two cases the asserted patent has expired). An additional infringement proceeding is still pending in the court of first instance. In actions filed separately by Motorola to invalidate these patents, the Federal Patent Court in 2013 and 2014 held the Microsoft patents invalid, and Microsoft appealed. For the cases in which Microsoft obtained injunctions, if Motorola were to prevail following all appeals, Motorola could have a claim against Microsoft for damages caused by an erroneously granted injunction.

IPCom patent litigation

IPCom GmbH & Co. (“IPCom”) is a German company that holds a large portfolio of mobile technology related patents spanning about 170 patent families and addressing a broad range of cellular technologies. IPCom has asserted 19 of these patents in litigation against Nokia and many of the leading cell phone companies and operators. In November 2014, Microsoft and IPCom entered into a standstill agreement staying all of the pending litigation against Microsoft to permit the parties to pursue settlement discussions.

InterDigital patent litigation

InterDigital Technology Corporation and InterDigital Communications Corporation (collectively, “IDT”) filed four patent infringement cases against Nokia in the ITC and in U.S. District Court for the District of Delaware between 2007 and 2013. We have been added to these cases as a defendant. IDT has cases pending against other defendants based on the same patents because most of the patents at issue allegedly relate to 3G and 4G wireless communications standards essential functionality. The cases involving us include three ITC investigations where IDT is seeking an order excluding importation of 3G and 4G phones into the U.S. and one active case in U.S. District Court in Delaware seeking an injunction and damages. The ITC issued a finding of no violation relating to two of the investigations, which IDT appealed. In February 2015, the U.S. Court of Appeals for the Federal Circuit affirmed one of the ITC’s findings; the other has been stayed. The Delaware case is set for trial beginning in April 2015.

European copyright levies

We have assumed from Nokia all potential liability due to Nokia’s alleged failure to pay “private copying levies” in various European countries based upon sale of memory cards and mobile phones that incorporate blank memory. The levies are based upon a 2001 European Union (“EU”) Directive establishing a right for end users to make copies of copyrighted works for personal or private use, but also allowing the collection of levies based upon sales of blank media or recording devices to compensate copyright holders for private copying. Various collecting societies in EU countries initiated litigation against Nokia, stating that Nokia must pay levies not only based upon sales of blank memory cards, but also phones that include blank memory for data storage on the phones, regardless of actual usage of that memory. The most significant cases against Nokia are pending in Germany and Austria, due to both the high volume of sales and high levy amounts sought in these countries. In December 2014, the appellate court in Germany found that levies may be imposed with respect to certain mobile phones sold between 2004 and 2007. We plan to appeal.

Other patent and intellectual property claims

In addition to these cases, there are approximately 90 other patent infringement cases pending against Microsoft.

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Product-Related Litigation

U.S. cell phone litigation

Nokia, along with other handset manufacturers and network operators, is a defendant in 19 lawsuits filed in the Superior Court for the District of Columbia by individual plaintiffs who allege that radio emissions from cellular handsets caused their brain tumors and other adverse health effects. We have assumed responsibility for these claims as part of the NDS acquisition and have been substituted for the Nokia defendants. Nine of these cases were filed in 2002 and are consolidated for certain pre-trial proceedings; the remaining 10 cases are stayed. In a separate 2009 decision, the Court of Appeals for the District of Columbia held that adverse health effect claims arising from the use of cellular handsets that operate within the U.S. Federal Communications Commission radio frequency emission guidelines (“FCC Guidelines”) are pre-empted by federal law. The plaintiffs allege that their handsets either operated outside the FCC Guidelines or were manufactured before the FCC Guidelines went into effect. The lawsuits also allege an industry-wide conspiracy to manipulate the science and testing around emission guidelines.

In September 2013, defendants in the consolidated cases moved to exclude plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. The motion was heard in December 2013 and January 2014. In March 2014, defendants filed a separate motion to preclude plaintiffs’ general causation testimony on the ground that it is pre-empted by federal law because the experts challenge the safety of all cellular handsets, including those that comply with the FCC Guidelines. In August 2014, the court granted in part defendants’ motion to exclude plaintiffs’ general causation experts. The court granted an order permitting an interlocutory appeal of its decision in October 2014. In December 2014, the District of Columbia Court of Appeals agreed to hear en banc defendants’ interlocutory appeal challenging the standard for evaluating expert scientific evidence. The appeal is scheduled for argument in May 2015. Trial court proceedings are stayed pending resolution of the appeal.

Canadian cell phone class action

Nokia, along with other handset manufacturers and network operators, is a defendant in a 2013 class action lawsuit filed in the Supreme Court of British Columbia by a purported class of Canadians who have used cellular phones for at least 1,600 hours, including a subclass of users with brain tumors. Microsoft was served with the complaint in June 2014 and has been substituted for the Nokia defendants. The litigation is not yet active as several defendants remain to be served.

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 consolidated 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, 2015, we had accrued aggregate liabilities of $640 million in other current liabilities and $30 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 $1.9 billion 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 consolidated financial statements for the period in which the effects become reasonably estimable.

NOTE 16 — STOCKHOLDERS’ EQUITY

Share Repurchases

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

(In millions)

Three Months Ended
March 31,

Nine Months Ended
March 31,

2015

2014

2015

2014

Shares of common stock repurchased

116

202

147

Value of common stock repurchased

5,000

1,791

9,000

5,291

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The above table excludes shares repurchased to settle statutory employee tax withholding related to the vesting of stock awards. On September 16, 2013, our Board of Directors approved a share repurchase plan authorizing up to $40.0 billion in share repurchases. The share repurchase program became effective October 1, 2013, has no expiration date, and may be suspended or discontinued at any time without notice. As of March 31, 2015, $26.1 billion remained of our $40.0 billion share repurchase program. All repurchases were made using cash resources.

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 2015

September 16, 2014

0.31

November 20, 2014

2,547

December 11, 2014

December 3, 2014

0.31

February 19, 2015

2,532

March 12, 2015

March 10, 2015

0.31

May 21, 2015

2,515

June 11, 2015

Fiscal Year 2014

September 16, 2013

0.28

November 21, 2013

2,332

December 12, 2013

November 19, 2013

0.28

February 20, 2014

2,322

March 13, 2014

March 11, 2014

0.28

May 15, 2014

2,309

June 12, 2014

The dividend declared on March 10, 2015 was included in other current liabilities as of March 31, 2015.

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NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes the changes in accumulated other comprehensive income by component:


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


	2015			2014			2015			2014

Derivatives

Accumulated other comprehensive income balance, beginning of period	$	597		$	83		$	31		$	66
Unrealized gains (losses), net of tax effects of $25, $3, $37, and $3		559			(2	)		1,251			57

Reclassification adjustments for gains included in revenue		(162	)		(31	)		(290	)		(75	)
Tax expense included in provision for income taxes		4			2			6			4

Amounts reclassified from accumulated other comprehensive income		(158	)		(29	)		(284	)		(71	)

Net current period other comprehensive income (loss)		401			(31	)		967			(14	)

Accumulated other comprehensive income balance, end of period	$	998		$	52		$	998		$	52


Investments

Accumulated other comprehensive income balance, beginning of period	$	3,111		$	3,228		$	3,531		$	1,794
Unrealized gains, net of tax effects of $133, $72, $47, and $832		245			133			83			1,607

Reclassification adjustments for gains included in other income (expense), net		(185	)		(100	)		(583	)		(163	)
Tax expense included in provision for income taxes		65			35			205			58

Amounts reclassified from accumulated other comprehensive income		(120	)		(65	)		(378	)		(105	)

Net current period other comprehensive income (loss)		125			68			(295	)		1,502

Accumulated other comprehensive income balance, end of period	$	3,236		$	3,296		$	3,236		$	3,296


Translation adjustments and other

Accumulated other comprehensive income (loss) balance, beginning of period	$	(325	)	$	(34	)	$	146		$	(117	)
Translation adjustments and other, net of tax effects of $(174), $9, $(432), and $53		(438	)		18			(909	)		101

Accumulated other comprehensive loss balance, end of period	$	(763	)	$	(16	)	$	(763	)	$	(16	)

Accumulated other comprehensive income, end of period	$	3,471		$	3,332		$	3,471		$	3,332

NOTE 18 — 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 in this note is reported on that basis. During the periods presented, we reported our financial performance based on the following segments; D&C Licensing, Computing and Gaming Hardware, Phone Hardware, D&C Other, Commercial Licensing, and Commercial Other.

On April 25, 2014, we acquired substantially all of NDS. See Note 8 – Business Combinations for additional details. NDS has been included in our consolidated results of operations since the acquisition date. We report the financial performance of the acquired business in our Phone Hardware segment. Prior to the acquisition of NDS, financial results associated with our joint strategic initiatives with Nokia were reflected in our D&C Licensing segment. The contractual relationship with Nokia related to those initiatives ended in conjunction with the acquisition.

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Our reportable segments are described below.

Devices and Consumer

Our D&C segments develop, manufacture, market, and support products and services designed to entertain and connect people, increase personal productivity, help people simplify tasks and make more informed decisions online, and help advertisers connect with audiences. Our D&C segments are:

•

D&C Licensing, comprising: Windows, including all original equipment manufacturer (“OEM”) licensing (“Windows OEM”) and other non-volume licensing and academic volume licensing of the Windows operating system and related software; non-volume licensing of Microsoft Office, comprising the core Office product set, for consumers (“Office Consumer”); Windows Phone operating system, including related patent licensing; and certain other patent licensing revenue;

•

Computing and Gaming Hardware, comprising: Xbox gaming and entertainment consoles and accessories, second-party and third-party video game royalties, and Xbox Live subscriptions (“Xbox Platform”); Surface devices and accessories (“Surface”); and Microsoft PC accessories;

•

Phone Hardware, comprising: Lumia phones and other non-Lumia phones, beginning with our acquisition of NDS; and

•

D&C Other, comprising: Resale, including Windows Store, Xbox Live transactions, and Windows Phone Store; search advertising; display advertising; Office 365 Consumer, comprising Office 365 Home and Office 365 Personal; Studios, comprising first-party video games; Mojang; non-Microsoft products sold in our retail stores; and certain other consumer products and services not included in the categories above.

Commercial

Our Commercial segments develop, market, and support software and services designed to increase individual, team, and organizational productivity and efficiency, including simplifying everyday tasks through seamless operations across the user’s hardware and software. Our Commercial segments are:

•

Commercial Licensing, comprising: server products, including Windows Server, Microsoft SQL Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); Windows Embedded; volume licensing of the Windows operating system, excluding academic (“Windows Commercial”); Microsoft Office for business, including Office, Exchange, SharePoint, Skype for Business, and related CALs (“Office Commercial”); Microsoft Dynamics business solutions, excluding Dynamics CRM Online; and Skype; and

•

Commercial Other, comprising: Enterprise Services, including Premier Support Services and Microsoft Consulting Services; Commercial Cloud, comprising Office 365 Commercial, other Microsoft Office online offerings, Dynamics CRM Online, and Microsoft Azure; and certain other commercial products and online services not included in the categories above.

Revenue and cost of revenue are generally directly attributed to our segments. Certain revenue contracts are allocated among the segments based on the relative value of the underlying products and services, which can include allocation based on actual prices charged, prices when sold separately, or estimated costs plus a profit margin. Cost of revenue is directly charged to our hardware segments. For the remaining segments, cost of revenue is directly charged in most cases and allocated in certain cases, generally using a relative revenue methodology.

We do not allocate operating expenses to our segments. Rather, we allocate them to our two segment groups, Devices and Consumer and Commercial. Due to the integrated structure of our business, allocations of expenses are made in certain cases to incent cross-collaboration among our segment groups so that a segment group is not solely burdened by the cost of a mutually beneficial activity as we seek to deliver seamless experiences across devices, whether on-premises or in the cloud.

Operating expenses are attributed to our segment groups as follows:

•

Sales and marketing expenses are primarily recorded directly to each segment group based on identified customer segment.

•

Research and development expenses are primarily shared across the segment groups based on relative gross margin but are mapped directly in certain cases where the value of the expense only accrues to that segment group.

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•

General and administrative expenses are primarily allocated based on relative gross margin.

Certain corporate-level activity is not allocated to our segment groups, including costs of: legal, including expenses, settlements, and fines; information technology; human resources; finance; excise taxes; and integration and restructuring expenses.

Segment revenue and gross margin were as follows during the periods presented:


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


		2015			2014			2015		2014

Revenue

Devices and Consumer	Licensing	$	3,476		$	4,597		$	11,736	$	14,625

	Hardware:
	Computing and Gaming Hardware		1,800			1,872			8,250		7,751
	Phone Hardware		1,397			0			6,290		0

	Total Devices and Consumer Hardware		3,197			1,872			14,540		7,751
	Other		2,280			1,824			6,525		5,252

	Total Devices and Consumer		8,953			8,293			32,801		27,628


Commercial	Licensing		10,036			10,335			30,588		30,852
	Other		2,760			1,902			7,760		5,284

	Total Commercial		12,796			12,237			38,348		36,136

Corporate and Other			(20	)		(127	)		251		(313	)

Total revenue		$	21,729		$	20,403		$	71,400	$	63,451


Gross Margin

Devices and Consumer	Licensing	$	3,210		$	4,017		$	10,904	$	12,918

	Hardware:
	Computing and Gaming Hardware		414			258			1,353		874
	Phone Hardware		(4	)		0			805		0

	Total Devices and Consumer Hardware		410			258			2,158		874
	Other		566			391			1,428		1,102

	Total Devices and Consumer		4,186			4,666			14,490		14,894


Commercial	Licensing		9,275			9,432			28,301		28,317
	Other		1,144			475			2,849		1,164

	Total Commercial		10,419			9,907			31,150		29,481

Corporate and Other			(37	)		(148	)		190		(369	)

Total gross margin		$	14,568		$	14,425		$	45,830	$	44,006

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Below are operating expenses by segment group. As discussed above, we do not allocate operating expenses to our segments.


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


	2015		2014		2015		2014

Devices and Consumer	$	2,530	$	2,336	$	8,913	$	7,802
Commercial		4,263		4,157		12,596		12,368
Corporate and Other		991		958		2,534		2,559

Total segment operating expenses		7,784		7,451		24,043		22,729
Integration and restructuring		190		0		1,573		0

Total operating expenses	$	7,974	$	7,451	$	25,616	$	22,729

Below is operating income (loss) by segment group.


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


	2015			2014			2015			2014

Devices and Consumer	$	1,656		$	2,330		$	5,577		$	7,092
Commercial		6,156			5,750			18,554			17,113
Corporate and Other		(1,218	)		(1,106	)		(3,917	)		(2,928	)

Total operating income	$	6,594		$	6,974		$	20,214		$	21,277

Corporate and Other operating income includes 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.

Corporate and Other activity was as follows:


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


	2015			2014			2015			2014

Corporate ^(a)(b)	$	(1,175	)	$	(931	)	$	(3,998	)	$	(2,530	)
Other (adjustments to U.S. GAAP):
Revenue reconciling amounts ^(c)		(20	)		(127	)		251			(313	)
Cost of revenue reconciling amounts		(17	)		(21	)		(61	)		(56	)
Operating expenses reconciling amounts		(6	)		(27	)		(109	)		(29	)

Total Corporate and Other	$	(1,218	)	$	(1,106	)	$	(3,917	)	$	(2,928	)

(a)

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