Item 8. Financial Statements and Supplementary Data

The following table presents the notional amounts of our outstanding derivative instruments measured in U.S. dollar equivalents:

(In millions)		June 30, 2023				June 30, 2022
Designated as Hedging Instruments
Foreign exchange contracts purchased		$	1,492			$	635
Interest rate contracts purchased			1,078				1,139
Not Designated as Hedging Instruments
Foreign exchange contracts purchased			7,874				10,322
Foreign exchange contracts sold			25,159				21,606
Equity contracts purchased			3,867				1,131
Equity contracts sold			2,154				0
Other contracts purchased			1,224				1,642
Other contracts sold			581				544

Fair Values of Derivative Instruments

The following table presents our derivative instruments:

(In millions)		Derivative Assets			Derivative Liabilities				Derivative Assets				Derivative Liabilities
		June 30, 2023							June 30, 2022
Designated as Hedging Instruments
Foreign exchange contracts		$	34			$	**(**67	)		$	0			$	(77	)
Interest rate contracts			16				0				3				0
Not Designated as Hedging Instruments
Foreign exchange contracts			249				**(**332	)			333				(362	)
Equity contracts			165				**(**400	)			5				(95	)
Other contracts			5				**(**6	)			15				(17	)
Gross amounts of derivatives			469				**(**805	)			356				(551	)
Gross amounts of derivatives offset in the balance sheet			**(**202	)			206				(130	)			133
Cash collateral received			0				**(**125	)			0				(75	)
Net amounts of derivatives		$	267			$	**(**724	)		$	226			$	(493	)
Reported as
Short-term investments		$	6			$	0			$	8			$	0
Other current assets			245				0				218				0
Other long-term assets			16				0				0				0
Other current liabilities			0				**(**341	)			0				(298	)
Other long-term liabilities			0				**(**383	)			0				(195	)
Total		$	267			$	**(**724	)		$	226			$	(493	)

Gross derivative assets and liabilities subject to legally enforceable master netting agreements for which we have elected to offset were $442 million and $804 million, respectively, as of June 30, 2023, and $343 million and $550 million, respectively, as of June 30, 2022.

The following table presents the fair value of our derivatives instruments on a gross basis:

(In millions)		Level 1					Level 2			Level 3				Total
June 30, 2023
Derivative assets		$	0			$	462			$	7			$	469
Derivative liabilities			0				**(**805	)			0				**(**805	)
June 30, 2022
Derivative assets			1				349				6				356
Derivative liabilities			0				(551	)			0				(551	)

PART II

Item 8

Gains (losses) on derivative instruments recognized in other income (expense), net were as follows:

(In millions)
Year Ended June 30,		2023				2022				2021
Designated as Fair Value Hedging Instruments
Foreign exchange contracts
Derivatives		$	0			$	49			$	193
Hedged items			0				(50	)			(188	)
Excluded from effectiveness assessment			0				4				30
Interest rate contracts
Derivatives			**(**65	)			(92	)			(37	)
Hedged items			38				108				53
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Amount reclassified from accumulated other comprehensive income			61				(79	)			17
Not Designated as Hedging Instruments
Foreign exchange contracts			**(**73	)			383				27
Equity contracts			**(**420	)			13				(6	)
Other contracts			**(**41	)			(85	)			15

Gains (losses), net of tax, on derivative instruments recognized in our consolidated comprehensive income statements were as follows:

(In millions)
Year Ended June 30,		2023				2022				2021
Designated as Cash Flow Hedging Instruments
Foreign exchange contracts
Included in effectiveness assessment		$	34			$	(57	)		$	34

NOTE 6 — INVENTORIES

The components of inventories were as follows:

(In millions)
June 30,		2023				2022
Raw materials		$	709			$	1,144
Work in process			23				82
Finished goods			1,768				2,516
Total		$	2,500			$	3,742

PART II

Item 8

NOTE 7 — PROPERTY AND EQUIPMENT

The components of property and equipment were as follows:

(In millions)
June 30,		2023				2022
Land		$	5,683			$	4,734
Buildings and improvements			68,465				55,014
Leasehold improvements			8,537				7,819
Computer equipment and software			74,961				60,631
Furniture and equipment			6,246				5,860
Total, at cost			163,892				134,058
Accumulated depreciation			**(**68,251	)			(59,660	)
Total, net		$	95,641			$	74,398

During fiscal years 2023, 2022, and 2021, depreciation expense was $11.0 billion, $12.6 billion, and $9.3 billion, respectively. Depreciation expense declined in fiscal year 2023 due to the change in estimated useful lives of our server and network equipment.

As of June 30, 2023, we have committed $13.5 billion for the construction of new buildings, building improvements, and leasehold improvements, primarily related to datacenters.

NOTE 8 — BUSINESS COMBINATIONS

Nuance Communications, Inc.

On March 4, 2022, we completed our acquisition of Nuance Communications, Inc. (“Nuance”) for a total purchase price of $18.8 billion, consisting primarily of cash. Nuance is a cloud and artificial intelligence (“AI”) software provider with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings. The financial results of Nuance have been included in our consolidated financial statements since the date of the acquisition. Nuance is reported as part of our Intelligent Cloud segment.

The allocation of the purchase price to goodwill was completed as of December 31, 2022. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:

(In millions)
Goodwill (a)						$	16,326
Intangible assets							4,365
Other assets							42
Other liabilities (b)							(1,972	)
Total						$	18,761

(a)

Goodwill was assigned to our Intelligent Cloud segment and was primarily attributed to increased synergies that are expected to be achieved from the integration of Nuance. None of the goodwill is expected to be deductible for income tax purposes.

(b)

*Includes $*986 million of convertible senior notes issued by Nuance in 2015 and 2017, substantially all of which have been redeemed.

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

(In millions, except average life)		Amount					Weighted Average Life
Customer-related		$	2,610			9 years
Technology-based			1,540			5 years
Marketing-related			215			4 years
Total		$	4,365			7 years

PART II

Item 8

ZeniMax Media Inc.

On March 9, 2021, we completed our acquisition of ZeniMax Media Inc. (“ZeniMax”), the parent company of Bethesda Softworks LLC (“Bethesda”), for a total purchase price of $8.1 billion, consisting primarily of cash. The purchase price included $766 million of cash and cash equivalents acquired. Bethesda is one of the largest, privately held game developers and publishers in the world, and brings a broad portfolio of games, technology, and talent to Xbox. The financial results of ZeniMax have been included in our consolidated financial statements since the date of the acquisition. ZeniMax is reported as part of our More Personal Computing segment.

The allocation of the purchase price to goodwill was completed as of December 31, 2021. The major classes of assets and liabilities to which we have allocated the purchase price were as follows:

(In millions)
Cash and cash equivalents						$	766
Goodwill							5,510
Intangible assets							1,968
Other assets							121
Other liabilities							(244	)
Total						$	8,121

Goodwill was assigned to our More Personal Computing segment. The goodwill was primarily attributed to increased synergies that are expected to be achieved from the integration of ZeniMax. None of the goodwill is expected to be deductible for income tax purposes.

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

(In millions, except average life)		Amount					Weighted Average Life
Technology-based		$	1,341			4 years
Marketing-related			627			11 years
Total		$	1,968			6 years

Activision Blizzard, Inc.

On January 18, 2022, we entered into a definitive agreement to acquire Activision Blizzard, Inc. (“Activision Blizzard”) for $95.00 per share in an all-cash transaction valued at $68.7 billion, inclusive of Activision Blizzard’s net cash. Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud gaming. The acquisition has been approved by Activision Blizzard’s shareholders. We continue to work toward closing the transaction subject to obtaining required regulatory approvals and satisfaction of other customary closing conditions. Microsoft and Activision Blizzard have jointly agreed to extend the merger agreement through October 18, 2023 to allow for additional time to resolve remaining regulatory concerns.

NOTE 9 — GOODWILL

Changes in the carrying amount of goodwill were as follows:

(In millions)			June 30, 2021				Acquisitions				Other				June 30, 2022				Acquisitions				Other				June 30, 2023
Productivity and Business Processes		$	24,317			$	599			$	(105	)		$	24,811			$	11			$	**(**47	)		$	24,775
Intelligent Cloud			13,256				16,879				47				30,182				223				64				30,469
More Personal Computing			12,138				648				(255	)			12,531				0				111				12,642
Total		$	49,711			$	18,126			$	(313	)		$	67,524			$	234			$	128			$	67,886

PART II

Item 8

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 change in the amounts allocated to goodwill during the periods in which the adjustments are determined.

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

Goodwill Impairment

We test goodwill for impairment annually on May 1 at the reporting unit level, primarily using a discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses.

No instances of impairment were identified in our May 1, 2023, May 1, 2022, or May 1, 2021 tests. As of June 30, 2023 and 2022, accumulated goodwill impairment was $11.3 billion.

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
June 30,										2023												2022
Technology-based		$	11,245			$	**(**7,589	)		$	3,656			$	11,277			$	(6,958	)		$	4,319
Customer-related			7,281				**(**4,047	)			3,234				7,342				(3,171	)			4,171
Marketing-related			4,935				**(**2,473	)			2,462				4,942				(2,143	)			2,799
Contract-based			29				**(**15	)			14				16				(7	)			9
Total		$	23,490			$	**(**14,124	)		$	9,366			$	23,577			$	(12,279	)		$	11,298

No material impairments of intangible assets were identified during fiscal years 2023, 2022, or 2021. We estimate that we have no significant residual value related to our intangible assets.

The components of intangible assets acquired during the periods presented were as follows:

(In millions)		Amount				Weighted Average Life				Amount				Weighted Average Life
Year Ended June 30,		2023								2022
Technology-based		$	522				7 years			$	2,611				4 years
Customer-related			0				0 years				2,837				9 years
Marketing-related			7				5 years				233				4 years
Contract-based			12				3 years				0				0 years
Total		$	541				6 years			$	5,681				7 years

Intangible assets amortization expense was $2.5 billion, $2.0 billion, and $1.6 billion for fiscal years 2023, 2022, and 2021, respectively.

PART II

Item 8

The following table outlines the estimated future amortization expense related to intangible assets held as of June 30, 2023:

(In millions)
Year Ending June 30,
2024		$	2,363
2025			1,881
2026			1,381
2027			929
2028			652
Thereafter			2,160
Total		$	9,366

NOTE 11 — DEBT

The components of debt were as follows:

(In millions, issuance by calendar year)		Maturities (calendar year)					Stated Interest Rate						Effective Interest Rate				June 30, 2023					June 30, 2022
2009 issuance of $3.8 billion					2039					5.20**%**					5.24**%**			$	520			$	520
2010 issuance of $4.8 billion					2040					4.50**%**					4.57**%**				486				486
2011 issuance of $2.3 billion					2041					5.30**%**					5.36**%**				718				718
2012 issuance of $2.3 billion					2042					3.50**%**					3.57**%**				454				1,204
2013 issuance of $5.2 billion			2023	–	2043			3.63**%**	–	4.88**%**			3.73**%**	–	4.92**%**				1,814				2,814
2013 issuance of €4.1 billion			2028	–	2033			2.63**%**	–	3.13**%**			2.69**%**	–	3.22**%**				2,509				2,404
2015 issuance of $23.8 billion			2025	–	2055			2.70**%**	–	4.75**%**			2.77**%**	–	4.78**%**				9,805				10,805
2016 issuance of $19.8 billion			2023	–	2056			2.00**%**	–	3.95**%**			2.10**%**	–	4.03**%**				9,430				9,430
2017 issuance of $17.0 billion			2024	–	2057			2.88**%**	–	4.50**%**			3.04**%**	–	4.53**%**				8,945				8,945
2020 issuance of $10.0 billion			2050	–	2060			2.53**%**	–	2.68**%**			2.53**%**	–	2.68**%**				10,000				10,000
2021 issuance of $8.2 billion			2052	–	2062			2.92**%**	–	3.04**%**			2.92**%**	–	3.04**%**				8,185				8,185
Total face value																			52,866				55,511
Unamortized discount and issuance costs																			**(**438	)			(471	)
Hedge fair value adjustments (a)																			**(**106	)			(68	)
Premium on debt exchange																			**(**5,085	)			(5,191	)
Total debt																			47,237				49,781
Current portion of long-term debt																			**(**5,247	)			(2,749	)
Long-term debt																		$	41,990			$	47,032

(a)

Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.

As of June 30, 2023 and 2022, the estimated fair value of long-term debt, including the current portion, was $46.2 billion and $50.9 billion, respectively. The estimated fair values are based on Level 2 inputs.

Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid for interest on our debt for fiscal years 2023, 2022, and 2021 was $1.7 billion, $1.9 billion, and $2.0 billion, respectively.

PART II

Item 8

The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2023:

(In millions)
Year Ending June 30,
2024		$	5,250
2025			2,250
2026			3,000
2027			8,000
2028			0
Thereafter			34,366
Total		$	52,866

NOTE 12 — INCOME TAXES

Provision for Income Taxes

The components of the provision for income taxes were as follows:

(In millions)
Year Ended June 30,		2023				2022				2021
Current Taxes
U.S. federal		$	14,009			$	8,329			$	3,285
U.S. state and local			2,322				1,679				1,229
Foreign			6,678				6,672				5,467
Current taxes		$	23,009			$	16,680			$	9,981
Deferred Taxes
U.S. federal		$	**(**6,146	)		$	(4,815	)		$	25
U.S. state and local			**(**477	)			(1,062	)			(204	)
Foreign			564				175				29
Deferred taxes		$	**(**6,059	)		$	(5,702	)		$	(150	)
Provision for income taxes		$	16,950			$	10,978			$	9,831

PART II

Item 8

U.S. and foreign components of income before income taxes were as follows:

(In millions)
Year Ended June 30,		2023				2022				2021
U.S.		$	52,917			$	47,837			$	34,972
Foreign			36,394				35,879				36,130
Income before income taxes		$	89,311			$	83,716			$	71,102

Effective Tax Rate

The items accounting for the difference between income taxes computed at the U.S. federal statutory rate and our effective rate were as follows:

Year Ended June 30,		2023				2022				2021
Federal statutory rate			21.0**%**				21.0%				21.0%
Effect of:
Foreign earnings taxed at lower rates			(1.8)%				(1.3)%				(2.7)%
Impact of intangible property transfers			0**%**				(3.9)%				0%
Foreign-derived intangible income deduction			(1.3)%				(1.1)%				(1.3)%
State income taxes, net of federal benefit			1.6**%**				1.4%				1.4%
Research and development credit			(1.1)%				(0.9)%				(0.9)%
Excess tax benefits relating to stock-based compensation			(0.7)%				(1.9)%				(2.4)%
Interest, net			0.8**%**				0.5%				0.5%
Other reconciling items, net			0.5**%**				(0.7)%				(1.8)%
Effective rate			19.0**%**				13.1%				13.8%

In the first quarter of fiscal year 2022, we transferred certain intangible properties from our Puerto Rico subsidiary to the U.S. The transfer of intangible properties resulted in a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022, as the value of future U.S. tax deductions exceeded the current tax liability from the U.S. global intangible low-taxed income (“GILTI”) tax.

We have historically paid India withholding taxes on software sales through distributor withholding and tax audit assessments in India. In March 2021, the India Supreme Court ruled favorably in the case of Engineering Analysis Centre of Excellence Private Limited vs The Commissioner of Income Tax for companies in 86 separate appeals, some dating back to 2012, holding that software sales are not subject to India withholding taxes. Although we were not a party to the appeals, our software sales in India were determined to be not subject to withholding taxes. Therefore, we recorded a net income tax benefit of $620 million in the third quarter of fiscal year 2021 to reflect the results of the India Supreme Court decision impacting fiscal year 1996 through fiscal year 2016.

The decrease from the federal statutory rate in fiscal year 2023 is 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 center in Ireland. The decrease from the federal statutory rate in fiscal year 2022 is primarily due to the net income tax benefit related to the transfer of intangible properties, earnings taxed at lower rates in foreign jurisdictions resulting from producing and distributing our products and services through our foreign regional operations center in Ireland, and tax benefits relating to stock-based compensation. The decrease from the federal statutory rate in fiscal year 2021 is 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 and Puerto Rico, tax benefits relating to stock-based compensation, and tax benefits from the India Supreme Court decision on withholding taxes. In fiscal year 2023, our foreign regional operating center in Ireland, which is taxed at a rate lower than the U.S. rate, generated 81% of our foreign income before tax. In fiscal years 2022 and 2021, our foreign regional operating centers in Ireland and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 71% and 82% of our foreign income before tax. Other reconciling items, net consists primarily of tax credits and GILTI tax, and in fiscal year 2021, includes tax benefits from the India Supreme Court decision on withholding taxes. In fiscal years 2023, 2022, and 2021, there were no individually significant other reconciling items.

PART II

Item 8

The increase in our effective tax rate for fiscal year 2023 compared to fiscal year 2022 was primarily due to a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022 related to the transfer of intangible properties and a decrease in tax benefits relating to stock-based compensation. The decrease in our effective tax rate for fiscal year 2022 compared to fiscal year 2021 was primarily due to a $3.3 billion net income tax benefit in the first quarter of fiscal year 2022 related to the transfer of intangible properties, offset in part by changes in the mix of our income before income taxes between the U.S. and foreign countries, as well as tax benefits in the prior year from the India Supreme Court decision on withholding taxes, an agreement between the U.S. and India tax authorities related to transfer pricing, and final Tax Cuts and Jobs Act (“TCJA”) regulations.

The components of the deferred income tax assets and liabilities were as follows:

(In millions)
June 30,		2023				2022
Deferred Income Tax Assets
Stock-based compensation expense		$	681			$	601
Accruals, reserves, and other expenses			3,131				2,874
Loss and credit carryforwards			1,441				1,546
Amortization (a)			9,440				10,183
Leasing liabilities			5,041				4,557
Unearned revenue			3,296				2,876
Book/tax basis differences in investments and debt			373				0
Capitalized research and development (a)			6,958				473
Other			489				461
Deferred income tax assets			30,850				23,571
Less valuation allowance			**(**939	)			(1,012	)
Deferred income tax assets, net of valuation allowance		$	29,911			$	22,559
Deferred Income Tax Liabilities
Book/tax basis differences in investments and debt		$	0			$	(174	)
Leasing assets			**(**4,680	)			(4,291	)
Depreciation			**(**2,674	)			(1,602	)
Deferred tax on foreign earnings			**(**2,738	)			(3,104	)
Other			**(**89	)			(103	)
Deferred income tax liabilities		$	**(**10,181	)		$	(9,274	)
Net deferred income tax assets		$	19,730			$	13,285
Reported As
Other long-term assets		$	20,163			$	13,515
Long-term deferred income tax liabilities			**(**433	)			(230	)
Net deferred income tax assets		$	19,730			$	13,285

(a)

Provisions enacted in the TCJA related to the capitalization for tax purposes of research and development expenditures became effective on July 1, 2022. These provisions require us to capitalize research and development expenditures and amortize them on our U.S. tax return over five or fifteen years, depending on where research is conducted.

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when the taxes are paid or recovered.

As of June 30, 2023, we had federal, state, and foreign net operating loss carryforwards of $509 million, $1.2 billion, and $2.3 billion, respectively. The federal and state net operating loss carryforwards have varying expiration dates ranging from fiscal year 2024 to 2043 or indefinite carryforward periods, if not utilized. The majority of our foreign net operating loss carryforwards do not expire. Certain acquired net operating loss carryforwards are subject to an annual limitation but are expected to be realized with the exception of those which have a valuation allowance. As of June 30, 2023, we had $456 million federal capital loss carryforwards for U.S. tax purposes from our acquisition of Nuance. The federal capital loss carryforwards are subject to an annual limitation and will expire in fiscal year 2025.

PART II

Item 8

The valuation allowance disclosed in the table above relates to the foreign net operating loss carryforwards, federal capital loss carryforwards, and other net deferred tax assets that may not be realized.

Income taxes paid, net of refunds, were $23.1 billion, $16.0 billion, and $13.4 billion in fiscal years 2023, 2022, and 2021, respectively.

Uncertain Tax Positions

Gross unrecognized tax benefits related to uncertain tax positions as of June 30, 2023, 2022, and 2021, were $17.1 billion, $15.6 billion, and $14.6 billion, respectively, which were primarily included in long-term income taxes in our consolidated balance sheets. If recognized, the resulting tax benefit would affect our effective tax rates for fiscal years 2023, 2022, and 2021 by $14.4 billion, $13.3 billion, and $12.5 billion, respectively.

As of June 30, 2023, 2022, and 2021, we had accrued interest expense related to uncertain tax positions of $5.2 billion, $4.3 billion, and $4.3 billion, respectively, net of income tax benefits. The provision for income taxes for fiscal years 2023, 2022, and 2021 included interest expense related to uncertain tax positions of $918 million, $36 million, and $274 million, respectively, net of income tax benefits.

The aggregate changes in the gross unrecognized tax benefits related to uncertain tax positions were as follows:

(In millions)
Year Ended June 30,		2023				2022				2021
Beginning unrecognized tax benefits		$	15,593			$	14,550			$	13,792
Decreases related to settlements			**(**329	)			(317	)			(195	)
Increases for tax positions related to the current year			1,051				1,145				790
Increases for tax positions related to prior years			870				461				461
Decreases for tax positions related to prior years			**(**60	)			(246	)			(297	)
Decreases due to lapsed statutes of limitations			**(**5	)			0				(1	)
Ending unrecognized tax benefits		$	17,120			$	15,593			$	14,550

We settled a portion of the Internal Revenue Service (“IRS”) audit for tax years 2004 to 2006 in fiscal year 2011. In February 2012, the IRS withdrew its 2011 Revenue Agents Report related to unresolved issues for tax years 2004 to 2006 and reopened the audit phase of the examination. We also settled a portion of the IRS audit for tax years 2007 to 2009 in fiscal year 2016, and a portion of the IRS audit for tax years 2010 to 2013 in fiscal year 2018. In the second quarter of fiscal year 2021, we settled an additional portion of the IRS audits for tax years 2004 to 2013 and made a payment of $1.7 billion, including tax and interest. We remain under audit for tax years 2004 to 2017.

As of June 30, 2023, the primary unresolved issues for the IRS audits relate to transfer pricing, which could have a material impact in our consolidated financial statements when the matters are resolved. We believe our allowances for income tax contingencies are adequate. We have not received a proposed assessment for the unresolved key transfer pricing issues. We 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 tax contingencies for these issues within the next 12 months.

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 2022, some of which are currently under audit by local tax authorities. The resolution of each of these audits is not expected to be material to our consolidated financial statements.

PART II

Item 8

NOTE 13 — UNEARNED REVENUE

Unearned revenue by segment was as follows:

(In millions)
June 30,		2023				2022
Productivity and Business Processes		$	27,572			$	24,558
Intelligent Cloud			21,563				19,371
More Personal Computing			4,678				4,479
Total		$	53,813			$	48,408

Changes in unearned revenue were as follows:

(In millions)
Year Ended June 30, 2023
Balance, beginning of period			$	48,408
Deferral of revenue				123,935
Recognition of unearned revenue				**(**118,530	)
Balance, end of period			$	53,813

Revenue allocated to remaining performance obligations, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, was $229 billion as of June 30, 2023, of which $224 billion is related to the commercial portion of revenue. We expect to recognize approximately 45% of this revenue over the next 12 months and the remainder thereafter.

NOTE 14 — LEASES

We have operating and finance leases for datacenters, corporate offices, research and development facilities, Microsoft Experience Centers, and certain equipment. Our leases have remaining lease terms of less than 1 year to 18 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.

The components of lease expense were as follows:

(In millions)
Year Ended June 30,		2023					2022				2021
Operating lease cost		$	2,875			$	2,461			$	2,127
Finance lease cost:
Amortization of right-of-use assets		$	1,352			$	980			$	921
Interest on lease liabilities			501				429				386
Total finance lease cost		$	1,853			$	1,409			$	1,307

Supplemental cash flow information related to leases was as follows:

(In millions)
Year Ended June 30,		2023					2022				2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	2,706			$	2,368			$	2,052
Operating cash flows from finance leases			501				429				386
Financing cash flows from finance leases			1,056				896				648
Right-of-use assets obtained in exchange for lease obligations:
Operating leases			3,514				5,268				4,380
Finance leases			3,128				4,234				3,290

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Supplemental balance sheet information related to leases was as follows:

(In millions, except lease term and discount rate)
June 30,		2023				2022
Operating Leases
Operating lease right-of-use assets		$	14,346			$	13,148
Other current liabilities		$	2,409			$	2,228
Operating lease liabilities			12,728				11,489
Total operating lease liabilities		$	15,137			$	13,717
Finance Leases
Property and equipment, at cost		$	20,538			$	17,388
Accumulated depreciation			**(**4,647	)			(3,285	)
Property and equipment, net		$	15,891			$	14,103
Other current liabilities		$	1,197			$	1,060
Other long-term liabilities			15,870				13,842
Total finance lease liabilities		$	17,067			$	14,902
Weighted Average Remaining Lease Term
Operating leases			8 years				8 years
Finance leases			11 years				12 years
Weighted Average Discount Rate
Operating leases			2.9**%**				2.1%
Finance leases			3.4**%**				3.1%

The following table outlines maturities of our lease liabilities as of June 30, 2023:

(In millions)
Year Ending June 30,		Operating Leases				Finance Leases
2024		$	2,784			$	1,747
2025			2,508				2,087
2026			2,142				1,771
2027			1,757				1,780
2028			1,582				1,787
Thereafter			6,327				11,462
Total lease payments			17,100				20,634
Less imputed interest			**(**1,963	)			**(**3,567	)
Total		$	15,137			$	17,067

As of June 30, 2023, we have additional operating and finance leases, primarily for datacenters, that have not yet commenced of $7.7 billion and $34.4 billion, respectively. These operating and finance leases will commence between fiscal year 2024 and fiscal year 2030 with lease terms of 1 year to 18 years.

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NOTE 15 — CONTINGENCIES

U.S. Cell Phone Litigation

Microsoft Mobile Oy, a subsidiary of Microsoft, along with other handset manufacturers and network operators, is a defendant in 46 lawsuits, including 45 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 assumed responsibility for these claims in our agreement to acquire Nokia’s Devices and Services business 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 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 2013, the defendants in the consolidated cases moved to exclude the plaintiffs’ expert evidence of general causation on the basis of flawed scientific methodologies. In 2014, the trial court granted in part and denied in part the defendants’ motion to exclude the plaintiffs’ general causation experts. The defendants filed an interlocutory appeal to the District of Columbia Court of Appeals challenging the standard for evaluating expert scientific evidence. In October 2016, the Court of Appeals issued its decision adopting the standard advocated by the defendants and remanding the cases to the trial court for further proceedings under that standard. The plaintiffs have filed supplemental expert evidence, portions of which were stricken by the court. A hearing on general causation took place in September of 2022. In April of 2023, the court granted defendants’ motion to strike the testimony of plaintiffs’ experts that cell phones cause brain cancer and entered an order excluding all of plaintiffs’ experts from testifying.

Irish Data Protection Commission Matter

In 2018, the Irish Data Protection Commission (“IDPC”) began investigating a complaint against LinkedIn as to whether LinkedIn’s targeted advertising practices violated the recently implemented European Union General Data Protection Regulation (“GDPR”). Microsoft cooperated throughout the period of inquiry. In April 2023, the IDPC provided LinkedIn with a non-public preliminary draft decision alleging GDPR violations and proposing a fine. Microsoft intends to challenge the preliminary draft decision. There is no set timeline for the IDPC to issue a final decision.

Other Contingencies

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 in 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 June 30, 2023, we accrued aggregate legal liabilities of $617 million. While we intend to defend these matters vigorously, adverse outcomes that we estimate could reach approximately $600 million in aggregate beyond recorded amounts are reasonably possible. Were unfavorable final outcomes to occur, there exists the possibility of a material adverse impact in our consolidated financial statements for the period in which the effects become reasonably estimable.

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NOTE 16 — STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

(In millions)
Year Ended June 30,		2023				2022				2021
Balance, beginning of year			7,464				7,519				7,571
Issued			37				40				49
Repurchased			**(**69	)			(95	)			(101	)
Balance, end of year			7,432				7,464				7,519

Share Repurchases

On September 18, 2019, our Board of Directors approved a share repurchase program authorizing up to $40.0 billion in share repurchases. This share repurchase program commenced in February 2020 and was completed in November 2021.

On September 14, 2021, our Board of Directors approved a share repurchase program authorizing up to $60.0 billion in share repurchases. This share repurchase program commenced in November 2021, following completion of the program approved on September 18, 2019, has no expiration date, and may be terminated at any time. As of June 30, 2023, $22.3 billion remained of this $60.0 billion share repurchase program.

We repurchased the following shares of common stock under the share repurchase programs:

(In millions)		Shares				Amount				Shares				Amount				Shares				Amount
Year Ended June 30,		2023								2022								2021
First Quarter			17			$	4,600				21			$	6,200				25			$	5,270
Second Quarter			20				4,600				20				6,233				27				5,750
Third Quarter			18				4,600				26				7,800				25				5,750
Fourth Quarter			14				4,600				28				7,800				24				6,200
Total			69			$	18,400				95			$	28,033				101			$	22,970

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All repurchases were made using cash resources. Shares repurchased during fiscal year 2023 and the fourth and third quarters of fiscal year 2022 were under the share repurchase program approved on September 14, 2021. Shares repurchased during the second quarter of fiscal year 2022 were under the share repurchase programs approved on both September 14, 2021 and September 18, 2019. All other shares repurchased were under the share repurchase program approved on September 18, 2019. The above table excludes shares repurchased to settle employee tax withholding related to the vesting of stock awards of $3.8 billion, $4.7 billion, and $4.4 billion for fiscal years 2023, 2022, and 2021, respectively.

Dividends

Our Board of Directors declared the following dividends:

Declaration Date	Record Date					Payment Date			Dividend Per Share					Amount
Fiscal Year 2023														(In millions)
September 20, 2022			November 17, 2022				December 8, 2022			$	0.68			$	5,066
November 29, 2022			February 16, 2023				March 9, 2023				0.68				5,059
March 14, 2023			May 18, 2023				June 8, 2023				0.68				5,054
June 13, 2023			August 17, 2023				September 14, 2023				0.68				5,054
Total										$	2.72			$	20,233
Fiscal Year 2022
September 14, 2021			November 18, 2021				December 9, 2021			$	0.62			$	4,652
December 7, 2021			February 17, 2022				March 10, 2022				0.62				4,645
March 14, 2022			May 19, 2022				June 9, 2022				0.62				4,632
June 14, 2022			August 18, 2022				September 8, 2022				0.62				4,621
Total										$	2.48			$	18,550

The dividend declared on June 13, 2023 was included in other current liabilities as of June 30, 2023.

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NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

(In millions)
Year Ended June 30,		2023				2022				2021
Derivatives
Balance, beginning of period		$	**(**13	)		$	(19	)		$	(38	)
Unrealized gains (losses), net of tax of **$**9, $(15), and $9			34				(57	)			34
Reclassification adjustments for (gains) losses included in other income (expense), net			**(**61	)			79				(17	)
Tax expense (benefit) included in provision for income taxes			13				(16	)			2
Amounts reclassified from accumulated other comprehensive income (loss)			**(**48	)			63				(15	)
Net change related to derivatives, net of tax of $(4), $1, and $7			**(**14	)			6				19
Balance, end of period		$	**(**27	)		$	(13	)		$	(19	)
Investments
Balance, beginning of period		$	**(**2,138	)		$	3,222			$	5,478
Unrealized losses, net of tax of $(393), $(1,440), and $(589)			**(**1,523	)			(5,405	)			(2,216	)
Reclassification adjustments for (gains) losses included in other income (expense), net			99				57				(63	)
Tax expense (benefit) included in provision for income taxes			**(**20	)			(12	)			13
Amounts reclassified from accumulated other comprehensive income (loss)			79				45				(50	)
Net change related to investments, net of tax of $(373), $(1,428), and $(602)			**(**1,444	)			(5,360	)			(2,266	)
Cumulative effect of accounting changes			0				0				10
Balance, end of period		$	**(**3,582	)		$	(2,138	)		$	3,222
Translation Adjustments and Other
Balance, beginning of period		$	**(**2,527	)		$	(1,381	)		$	(2,254	)
Translation adjustments and other, net of tax of **$**0, $0, and $(9)			**(**207	)			(1,146	)			873
Balance, end of period		$	**(**2,734	)		$	(2,527	)		$	(1,381	)
Accumulated other comprehensive income (loss), end of period		$	**(**6,343	)		$	(4,678	)		$	1,822

NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. Awards that expire or are canceled without delivery of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.

Stock-based compensation expense and related income tax benefits were as follows:

(In millions)
Year Ended June 30,		2023				2022				2021
Stock-based compensation expense		$	9,611			$	7,502			$	6,118
Income tax benefits related to stock-based compensation			1,651				1,293				1,065

Stock Plans

Stock awards entitle the holder to receive shares of Microsoft common stock as the award vests. Stock awards generally vest over a service period of four years or five years.

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Executive Incentive Plan

Under the Executive Incentive Plan, the Compensation Committee approves stock awards to executive officers and certain senior executives. RSUs generally vest ratably over a service period of four years. PSUs generally vest over a performance period of three years. The number of shares the PSU holder receives is based on the extent to which the corresponding performance goals have been achieved.

Activity for All Stock Plans

The fair value of stock awards was estimated on the date of grant using the following assumptions:

Year ended June 30,						2023						2022						2021
Dividends per share (quarterly amounts)			$	0.62 – 0.68				$		0.56 – 0.62					$	0.51 – 0.56
Interest rates				2.0**% –** 5.4**%**						0.03% – 3.6%						0.01% – 1.5%

During fiscal year 2023, the following activity occurred under our stock plans:

Shares						Weighted Average Grant-Date Fair Value
(In millions)
Stock Awards
Nonvested balance, beginning of year			93			$	227.59
Granted (a)			56				252.59
Vested			**(**44	)			206.90
Forfeited			**(**9	)			239.93
Nonvested balance, end of year			96			$	250.37

(a)

Includes 1 million, 1 million, and 2 million of PSUs granted at target and performance adjustments above target levels for fiscal years 2023, 2022, and 2021, respectively.

As of June 30, 2023, total unrecognized compensation costs related to stock awards were $18.6 billion. These costs are expected to be recognized over a weighted average period of three years. The weighted average grant-date fair value of stock awards granted was $252.59, $291.22, and $221.13 for fiscal years 2023, 2022, and 2021, respectively. The fair value of stock awards vested was $11.9 billion, $14.1 billion, and $13.4 billion, for fiscal years 2023, 2022, and 2021, respectively. As of June 30, 2023, an aggregate of 164 million shares were authorized for future grant under our stock plans.

Employee Stock Purchase Plan

We have an ESPP for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period.

Employees purchased the following shares during the periods presented:

(Shares in millions)
Year Ended June 30,		2023				2022				2021
Shares purchased			7				7				8
Average price per share		$	245.59			$	259.55			$	207.88

As of June 30, 2023, 74 million shares of our common stock were reserved for future issuance through the ESPP.

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Savings Plans

We have savings plans in the U.S. that qualify under Section 401(k) of the Internal Revenue Code, and a number of savings plans in international locations. Eligible U.S. employees may contribute a portion of their salary into the savings plans, subject to certain limitations. We match a portion of each dollar a participant contributes into the plans. Employer-funded retirement benefits for all plans were $1.6 billion, $1.4 billion, and $1.2 billion in fiscal years 2023, 2022, and 2021, respectively, and were expensed as contributed.

NOTE 19 — SEGMENT INFORMATION AND GEOGRAPHIC DATA

In its operation of the business, management, including our chief operating decision maker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, we reported our financial performance based on the following segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.

We have recast certain prior period amounts to conform to the way we internally manage and monitor our business.

Our reportable segments are described below.

Productivity and Business Processes

Our Productivity and Business Processes segment consists of products and services in our portfolio of productivity, communication, and information services, spanning a variety of devices and platforms. This segment primarily comprises:

Office Commercial (Office 365 subscriptions, the Office 365 portion of Microsoft 365 Commercial subscriptions, and Office licensed on-premises), comprising Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Microsoft Viva, and Microsoft 365 Copilot.

Office Consumer, including Microsoft 365 Consumer subscriptions, Office licensed on-premises, and other Office services.

LinkedIn, including Talent Solutions, Marketing Solutions, Premium Subscriptions, and Sales Solutions.

Dynamics business solutions, including Dynamics 365, comprising a set of intelligent, cloud-based applications across ERP, CRM (including Customer Insights), Power Apps, and Power Automate; and on-premises ERP and CRM applications.

Intelligent Cloud

Our Intelligent Cloud segment consists of our public, private, and hybrid server products and cloud services that can power modern business and developers. This segment primarily comprises:

Server products and cloud services, including Azure and other cloud services; SQL Server, Windows Server, Visual Studio, System Center, and related Client Access Licenses (“CALs”); and Nuance and GitHub.

Enterprise Services, including Enterprise Support Services, Industry Solutions (formerly Microsoft Consulting Services), and Nuance professional services.

More Personal Computing

Our More Personal Computing segment consists of products and services that put customers at the center of the experience with our technology. This segment primarily comprises:

Windows, including Windows OEM licensing and other non-volume licensing of the Windows operating system; Windows Commercial, comprising volume licensing of the Windows operating system, Windows cloud services, and other Windows commercial offerings; patent licensing; and Windows Internet of Things.

Devices, including Surface, HoloLens, and PC accessories.

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Gaming, including Xbox hardware and Xbox content and services, comprising first- and third-party content (including games and in-game content), Xbox Game Pass and other subscriptions, Xbox Cloud Gaming, advertising, third-party disc royalties, and other cloud services.

Search and news advertising, comprising Bing (including Bing Chat), Microsoft News, Microsoft Edge, and third-party affiliates.

Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain revenue recognized and costs incurred by one segment may benefit other segments. Revenue from certain contracts is 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 allocated in certain cases based on a relative revenue methodology. Operating expenses that are allocated primarily include those relating to marketing of products and services from which multiple segments benefit and are generally allocated based on relative gross margin.

In addition, certain costs are incurred at a corporate level and allocated to our segments. These allocated costs generally include legal, including settlements and fines, information technology, human resources, finance, excise taxes, field selling, shared facilities services, customer service and support, and severance incurred as part of a corporate program. Each allocation is measured differently based on the specific facts and circumstances of the costs being allocated and is generally based on relative gross margin or relative headcount.

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

(In millions)
Year Ended June 30,			2023				2022				2021
Revenue
Productivity and Business Processes		$	69,274			$	63,364			$	53,915
Intelligent Cloud			87,907				74,965				59,728
More Personal Computing			54,734				59,941				54,445
Total		$	211,915			$	198,270			$	168,088
Operating Income
Productivity and Business Processes		$	34,189			$	29,690			$	24,351
Intelligent Cloud			37,884				33,203				26,471
More Personal Computing			16,450				20,490				19,094
Total		$	88,523			$	83,383			$	69,916

No sales to an individual customer or country other than the United States accounted for more than 10% of revenue for fiscal years 2023, 2022, or 2021. Revenue, classified by the major geographic areas in which our customers were located, was as follows:

(In millions)
Year Ended June 30,		2023				2022				2021
United States (a)		$	106,744			$	100,218			$	83,953
Other countries			105,171				98,052				84,135
Total		$	211,915			$	198,270			$	168,088

(a)

Includes billings to OEMs and certain multinational organizations because of the nature of these businesses and the impracticability of determining the geographic source of the revenue.

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Revenue, classified by significant product and service offerings, was as follows:

(In millions)
Year Ended June 30,		2023				2022				2021
Server products and cloud services		$	79,970			$	67,350			$	52,589
Office products and cloud services			48,728				44,862				39,872
Windows			21,507				24,732				22,488
Gaming			15,466				16,230				15,370
LinkedIn			15,145				13,816				10,289
Search and news advertising			12,208				11,591				9,267
Enterprise Services			7,722				7,407				6,943
Devices			5,521				7,306				7,143
Dynamics			5,437				4,687				3,754
Other			211				289				373
Total		$	211,915			$	198,270			$	168,088

Our Microsoft Cloud revenue, which includes Azure and other cloud services, Office 365 Commercial, the commercial portion of LinkedIn, Dynamics 365, and other commercial cloud properties, was $111.6 billion, $91.4 billion, and $69.1 billion in fiscal years 2023, 2022, and 2021, respectively. These amounts are primarily included in Server products and cloud services, Office products and cloud services, LinkedIn, and Dynamics in the table above.

Assets are not allocated to segments for internal reporting presentations. A portion of amortization and depreciation is included with various other costs in an overhead allocation to each segment. It is impracticable for us to separately identify the amount of amortization and depreciation by segment that is included in the measure of segment profit or loss.

Long-lived assets, excluding financial instruments and tax assets, classified by the location of the controlling statutory company and with countries over 10% of the total shown separately, were as follows:

(In millions)
June 30,		2023				2022				2021
United States		$	114,380			$	106,430			$	76,153
Ireland			16,359				15,505				13,303
Other countries			56,500				44,433				38,858
Total		$	187,239			$	166,368			$	128,314

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REPORT OF INDEPENDENT REGIST****ERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Microsoft Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Microsoft Corporation and subsidiaries (the "Company") as of June 30, 2023 and 2022, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity, for each of the three years in the period ended June 30, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 27, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition – Refer to Note 1 to the financial statements

Critical Audit Matter Description

The Company recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company offers customers the ability to acquire multiple licenses of software products and services, including cloud-based services, in its customer agreements through its volume licensing programs.

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Significant judgment is exercised by the Company in determining revenue recognition for these customer agreements, and includes the following:

Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based services.

The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation.

Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, optional purchases, and free services).

Determination of stand-alone selling prices for each distinct performance obligation and for products and services that are not sold separately.

Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following:

•	We tested the effectiveness of controls related to the identification of distinct performance obligations, the determination of the timing of revenue recognition, and the estimation of variable consideration.
•	We evaluated management's significant accounting policies related to these customer agreements for reasonableness.
•	We selected a sample of customer agreements and performed the following procedures:
-	Obtained and read contract source documents for each selection, including master agreements, and other documents that were part of the agreement.
-	Tested management's identification and treatment of contract terms.
-	Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions.
•	We evaluated the reasonableness of management's estimate of stand-alone selling prices for products and services that are not sold separately.
•	We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements.

Income Taxes – Uncertain Tax Positions – Refer to Note 12 to the financial statements

Critical Audit Matter Description

The Company's long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service ("IRS"). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company's financial statements.

Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management's estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists.

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Item 8

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following:

We evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls.

We read and evaluated management's documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions.

We tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions.

For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions.

We evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments.

/s/ DELOITTE & TOUCHE LLP

Seattle, Washington

July 27, 2023

We have served as the Company's auditor since 1983.

PART II

Item 9, 9A