ORACLE CORP (Form: 10-Q, Received: 03/13/2020 16:23:07)
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended February 29, 2020

or

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

For the transition period from ____________ to ____________

Commission File Number: 001-35992

 

Oracle Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

 

54-2185193

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

500 Oracle Parkway

 

94065

Redwood City, California 

(Address of principal executive offices)

 

(Zip Code)

 

(650) 506-7000

(Registrant’s telephone number, including area code)

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

2.25% senior notes due January 2021 

3.125% senior notes due July 2025 

ORCL

—

—

New York Stock Exchange

New York Stock Exchange 

New York Stock Exchange 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    ☒  No  ☐

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

 

Large accelerated filer   ☒

 

Accelerated filer   ☐

Non-accelerated filer   ☐

 

Smaller reporting company   ☐

Emerging growth company   ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ☐

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

The number of shares of registrant’s common stock outstanding as of March 9, 2020 was: 3,153,584,000.

 

 

 

Table of Contents

 

ORACLE CORPORATION 

FORM 10-Q QUARTERLY REPORT

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

3

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of February 29, 2020 and May 31, 2019

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended February 29, 2020 and February 28, 2019

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended February 29, 2020 and February 28, 2019

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Equity for the Three and Nine Months Ended February 29, 2020 and February 28, 2019

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended February 29, 2020 and February 28, 2019

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

27

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

44

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

45

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

45

 

 

 

 

 

Item 1A.

 

Risk Factors

 

45

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

45

 

 

 

 

 

Item 6.

 

Exhibits

 

46

 

 

 

 

 

 

 

Signatures

 

47

 

 

 

 

Table of Contents

 

Cautionary Note on Forward-Looking Statements

For purposes of this Quarterly Report, the terms “Oracle,” “we,” “us” and “our” refer to Oracle Corporation and its consolidated subsidiaries. This Quarterly Report on Form 10-Q contains statements that are not historical in nature, are predictive in nature, or that depend upon or refer to future events or conditions or otherwise contain forward-looking statements within the meaning of Section 21 of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These include, among other things, statements regarding:

 

•

our expectations regarding the potential impacts on our business of the outbreak of the novel coronavirus COVID-19;

 

•

our expectation that we may acquire companies, products, services and technologies to further our corporate strategy as compelling opportunities become available;

 

•

our expectation that, on a constant currency basis, our total cloud and license revenues generally will continue to increase due to expected growth in our cloud services and our license support offerings, and continued demand for our cloud license and on-premise license offerings;

 

•

our belief that our Oracle Cloud Software-as-a-Service and Infrastructure-as-a-Service (SaaS and IaaS, respectively, and collectively, Oracle Cloud Services) offerings are opportunities for us to expand our cloud and license business, and that demand for our Oracle Cloud Services will continue to increase;

 

•

our expectation that substantially all of our customers will renew their license support contracts annually;

 

•

our expectation that our hardware business will have lower operating margins as a percentage of revenues than our cloud and license business;

 

•

our expectation that we will continue to place significant emphasis, both domestically and internationally, on direct sales through our own sales force;

 

•

our expectation that we will continue to make significant investments in research and development, and our belief that research and development efforts are essential to maintaining our competitive position;

 

•

our expectation that our international operations will continue to provide a significant portion of our total revenues and expenses;

 

•

the sufficiency of our sources of funding for working capital, capital expenditures, contractual obligations, acquisitions, dividends, stock repurchases, debt repayments and other matters;

 

•

our belief that we have adequately provided under U.S. generally accepted accounting principles for outcomes related to our tax audits and that the final outcome of our tax related examinations, agreements or judicial proceedings will not have a material effect on our results of operations, and our belief that our net deferred tax assets will be realized in the foreseeable future;

 

•

our belief that the outcome of certain legal proceedings and claims to which we are a party will not, individually or in the aggregate, result in losses that are materially in excess of amounts already recognized, if any;

 

•

the possibility that certain legal proceedings to which we are a party could have a material impact on our future cash flows and results of operations;

 

•

our expectations regarding the timing and amount of expenses relating to the Fiscal 2019 Oracle Restructuring Plan and the improved efficiencies in our operations that such a plan will create;

 

•

the timing and amount of future cash dividend payments and stock repurchases, including our expectation that the levels of our future stock repurchase activity may be modified in comparison to past periods in order to use available cash for other purposes;

1

Table of Contents

 

 

•

our expectations regarding the impact of recent accounting pronouncements on our consolidated financial statements;

 

•

our expectation that, to the extent customers renew support contracts or cloud SaaS and IaaS contracts from companies that we have acquired, we will recognize revenues for the full contracts’ values over the respective renewal periods;

 

•

our ability to predict quarterly hardware revenues;

 

•

the percentage of remaining performance obligations that we expect to recognize as revenues over the next twelve months;

as well as other statements regarding our future operations, financial condition and prospects, and business strategies. Forward-looking statements may be preceded by, followed by or include the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “strives,” “estimates,” “will,” “should,” “is designed to” and similar expressions. We claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about our business that could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in “Risk Factors” included in documents we file from time to time with the U.S. Securities and Exchange Commission (the SEC), including our Annual Report on Form 10-K for our fiscal year ended May 31, 2019 and our other Quarterly Reports on Form 10-Q filed by us in our fiscal 2020, which runs from June 1, 2019 to May 31, 2020.

We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or risks, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. New information, future events or risks could cause the forward-looking events we discuss in this Quarterly Report not to occur. You should not place undue reliance on these forward-looking statements, which reflect our expectations only as of the date of this Quarterly Report.

2

Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

ORACLE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

As of February 29, 2020 and May 31, 2019

(Unaudited)

 

(in millions, except per share data)

 

February 29,

2020

 

 

May 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,829

 

 

$

20,514

 

Marketable securities

 

 

2,029

 

 

 

17,313

 

Trade receivables, net of allowances for doubtful accounts of $387 and $371 as of February 29, 2020 and May 31, 2019, respectively

 

 

4,162

 

 

 

5,134

 

Prepaid expenses and other current assets

 

 

3,422

 

 

 

3,425

 

Total current assets

 

 

33,442

 

 

 

46,386

 

Non-current assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

6,248

 

 

 

6,252

 

Intangible assets, net

 

 

4,088

 

 

 

5,279

 

Goodwill, net

 

 

43,781

 

 

 

43,779

 

Deferred tax assets

 

 

2,883

 

 

 

2,696

 

Other non-current assets

 

 

6,262

 

 

 

4,317

 

Total non-current assets

 

 

63,262

 

 

 

62,323

 

Total assets

 

$

96,704

 

 

$

108,709

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Notes payable, current

 

$

2,355

 

 

$

4,494

 

Accounts payable

 

 

533

 

 

 

580

 

Accrued compensation and related benefits

 

 

1,317

 

 

 

1,628

 

Deferred revenues

 

 

7,814

 

 

 

8,374

 

Other current liabilities

 

 

3,721

 

 

 

3,554

 

Total current liabilities

 

 

15,740

 

 

 

18,630

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Notes payable and other borrowings, non-current

 

 

49,320

 

 

 

51,673

 

Income taxes payable

 

 

13,168

 

 

 

13,295

 

Other non-current liabilities

 

 

3,595

 

 

 

2,748

 

Total non-current liabilities

 

 

66,083

 

 

 

67,716

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Oracle Corporation stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value—authorized: 1.0 shares; outstanding: none

 

 

—

 

 

 

—

 

Common stock, $0.01 par value and additional paid in capital—authorized: 11,000 shares; outstanding: 3,161 shares and 3,359 shares as of February 29, 2020 and May 31, 2019, respectively

 

 

26,685

 

 

 

26,909

 

Accumulated deficit

 

 

(10,771

)

 

 

(3,496

)

Accumulated other comprehensive loss

 

 

(1,679

)

 

 

(1,628

)

Total Oracle Corporation stockholders’ equity

 

 

14,235

 

 

 

21,785

 

Noncontrolling interests

 

 

646

 

 

 

578

 

Total equity

 

 

14,881

 

 

 

22,363

 

Total liabilities and equity

 

$

96,704

 

 

$

108,709

 

 

 

See notes to condensed consolidated financial statements.

3

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended February 29, 2020 and February 28, 2019

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in millions, except per share data)

 

February 29,

2020

 

 

February 28,

2019

 

 

February 29,

2020

 

 

February 28,

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud services and license support

 

$

6,930

 

 

$

6,662

 

 

$

20,546

 

 

$

19,908

 

Cloud license and on-premise license

 

 

1,231

 

 

 

1,251

 

 

 

3,169

 

 

 

3,334

 

Hardware

 

 

857

 

 

 

915

 

 

 

2,542

 

 

 

2,711

 

Services

 

 

778

 

 

 

786

 

 

 

2,372

 

 

 

2,416

 

Total revenues

 

 

9,796

 

 

 

9,614

 

 

 

28,629

 

 

 

28,369

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cloud services and license support(1)

 

 

991

 

 

 

937

 

 

 

2,994

 

 

 

2,807

 

Hardware(1)

 

 

271

 

 

 

339

 

 

 

828

 

 

 

998

 

Services(1)

 

 

702

 

 

 

700

 

 

 

2,147

 

 

 

2,127

 

Sales and marketing(1)

 

 

2,049

 

 

 

2,051

 

 

 

6,135

 

 

 

6,191

 

Research and development

 

 

1,500

 

 

 

1,426

 

 

 

4,588

 

 

 

4,464

 

General and administrative

 

 

288

 

 

 

316

 

 

 

903

 

 

 

935

 

Amortization of intangible assets

 

 

400

 

 

 

407

 

 

 

1,221

 

 

 

1,265

 

Acquisition related and other

 

 

7

 

 

 

(4

)

 

 

44

 

 

 

29

 

Restructuring

 

 

60

 

 

 

43

 

 

 

181

 

 

 

275

 

Total operating expenses

 

 

6,268

 

 

 

6,215

 

 

 

19,041

 

 

 

19,091

 

Operating income

 

 

3,528

 

 

 

3,399

 

 

 

9,588

 

 

 

9,278

 

Interest expense

 

 

(456

)

 

 

(509

)

 

 

(1,416

)

 

 

(1,557

)

Non-operating income, net

 

 

4

 

 

 

198

 

 

 

195

 

 

 

681

 

Income before provision for income taxes

 

 

3,076

 

 

 

3,088

 

 

 

8,367

 

 

 

8,402

 

Provision for income taxes

 

 

505

 

 

 

343

 

 

 

1,348

 

 

 

1,059

 

Net income

 

$

2,571

 

 

$

2,745

 

 

$

7,019

 

 

$

7,343

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.81

 

 

$

0.78

 

 

$

2.16

 

 

$

1.98

 

Diluted

 

$

0.79

 

 

$

0.76

 

 

$

2.10

 

 

$

1.93

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

3,190

 

 

 

3,526

 

 

 

3,251

 

 

 

3,716

 

Diluted

 

 

3,271

 

 

 

3,617

 

 

 

3,337

 

 

 

3,811

 

 

(1)

Exclusive of amortization of intangible assets, which is shown separately.

 

 

 

See notes to condensed consolidated financial statements.

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three and Nine Months Ended February 29, 2020 and February 28, 2019

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in millions)

 

February 29,

2020

 

 

February 28,

2019

 

 

February 29,

2020

 

 

February 28,

2019

 

Net income

 

$

2,571

 

 

$

2,745

 

 

$

7,019

 

 

$

7,343

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net foreign currency translation (losses) gains

 

 

(86

)

 

 

10

 

 

 

(178

)

 

 

(148

)

Net unrealized gains on defined benefit plans

 

 

34

 

 

 

6

 

 

 

45

 

 

 

19

 

Net unrealized gains on marketable securities

 

 

3

 

 

 

233

 

 

 

91

 

 

 

120

 

Net unrealized gains (losses) on cash flow hedges

 

 

7

 

 

 

(18

)

 

 

(9

)

 

 

(36

)

Total other comprehensive (loss) income, net

 

 

(42

)

 

 

231

 

 

 

(51

)

 

 

(45

)

Comprehensive income

 

$

2,529

 

 

$

2,976

 

 

$

6,968

 

 

$

7,298

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

5

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

For the Three and Nine Months Ended February 29, 2020 and February 28, 2019

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in millions, except per share data)

 

February 29,

2020

 

 

February 28,

2019

 

 

February 29,

2020

 

 

February 28,

2019

 

Common stock and additional paid in capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

26,374

 

 

$

27,430

 

 

$

26,909

 

 

$

28,950

 

Common stock issued

 

 

615

 

 

 

450

 

 

 

1,232

 

 

 

1,476

 

Stock-based compensation

 

 

361

 

 

 

427

 

 

 

1,204

 

 

 

1,259

 

Repurchase of common stock

 

 

(599

)

 

 

(1,533

)

 

 

(2,033

)

 

 

(4,496

)

Other, net

 

 

(66

)

 

 

(42

)

 

 

(627

)

 

 

(457

)

Balance, end of period

 

$

26,685

 

 

$

26,732

 

 

$

26,685

 

 

$

26,732

 

Accumulated deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(9,174

)

 

$

5,107

 

 

$

(3,496

)

 

$

19,111

 

Cumulative-effect of accounting change

 

—

 

 

 

—

 

 

—

 

 

 

(110

)

Repurchase of common stock

 

 

(3,401

)

 

 

(8,466

)

 

 

(11,967

)

 

 

(25,505

)

Cash dividends declared

 

 

(768

)

 

 

(670

)

 

 

(2,330

)

 

 

(2,126

)

Net income

 

 

2,571

 

 

 

2,745

 

 

 

7,019

 

 

 

7,343

 

Other, net

 

 

1

 

 

 

—

 

 

 

3

 

 

 

3

 

Balance, end of period

 

$

(10,771

)

 

$

(1,284

)

 

$

(10,771

)

 

$

(1,284

)

Other equity, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

(1,015

)

 

$

(1,482

)

 

$

(1,050

)

 

$

(1,188

)

Other comprehensive (loss) income, net

 

 

(42

)

 

 

231

 

 

 

(51

)

 

 

(45

)

Other, net

 

 

24

 

 

 

41

 

 

 

68

 

 

 

23

 

Balance, end of period

 

$

(1,033

)

 

$

(1,210

)

 

$

(1,033

)

 

$

(1,210

)

Total stockholders' equity

 

$

14,881

 

 

$

24,238

 

 

$

14,881

 

 

$

24,238

 

Cash dividends declared per common share

 

$

0.24

 

 

$

0.19

 

 

$

0.72

 

 

$

0.57

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

6

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ORACLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended February 29, 2020 and February 28, 2019

(Unaudited)

 

 

 

Nine Months Ended

 

(in millions)

 

February 29,

2020

 

 

February 28,

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

7,019

 

 

$

7,343

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,025

 

 

 

900

 

Amortization of intangible assets

 

 

1,221

 

 

 

1,265

 

Deferred income taxes

 

 

(398

)

 

 

(741

)

Stock-based compensation

 

 

1,204

 

 

 

1,259

 

Other, net

 

 

167

 

 

 

144

 

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

 

 

 

Decrease in trade receivables, net

 

 

946

 

 

 

1,106

 

Decrease in prepaid expenses and other assets

 

 

718

 

 

 

168

 

Decrease in accounts payable and other liabilities

 

 

(1,035

)

 

 

(647

)

Decrease in income taxes payable

 

 

(789

)

 

 

(410

)

Decrease in deferred revenues

 

 

(553

)

 

 

(258

)

Net cash provided by operating activities

 

 

9,525

 

 

 

10,129

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities and other investments

 

 

(399

)

 

 

(1,310

)

Proceeds from maturities of marketable securities and other investments

 

 

3,165

 

 

 

10,210

 

Proceeds from sales of marketable securities

 

 

12,575

 

 

 

11,328

 

Acquisitions, net of cash acquired

 

 

(111

)

 

 

(330

)

Capital expenditures

 

 

(1,131

)

 

 

(1,247

)

Net cash provided by investing activities

 

 

14,099

 

 

 

18,651

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments for repurchases of common stock

 

 

(13,935

)

 

 

(29,887

)

Proceeds from issuances of common stock

 

 

1,232

 

 

 

1,468

 

Shares repurchased for tax withholdings upon vesting of restricted stock-based awards

 

 

(624

)

 

 

(455

)

Payments of dividends to stockholders

 

 

(2,330

)

 

 

(2,126

)

Repayments of borrowings

 

 

(4,500

)

 

 

(4,500

)

Other, net

 

 

(108

)

 

 

(95

)

Net cash used for financing activities

 

 

(20,265

)

 

 

(35,595

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(44

)

 

 

(85

)

Net increase (decrease) in cash and cash equivalents

 

 

3,315

 

 

 

(6,900

)

Cash and cash equivalents at beginning of period

 

 

20,514

 

 

 

21,620

 

Cash and cash equivalents at end of period

 

$

23,829

 

 

$

14,720

 

Non-cash investing and financing transactions:

 

 

 

 

 

 

 

 

Fair values of stock awards assumed in connection with acquisitions

 

$

—

 

 

$

8

 

Change in unsettled repurchases of common stock

 

$

65

 

 

$

114

 

Change in unsettled investment sales

 

$

—

 

 

$

(168

)

 

 

See notes to condensed consolidated financial statements.

 

7

Table of Contents

 

ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

February 29, 2020

(Unaudited)

 

1.

BASIS OF PRESENTATION, RECENT ACCOUNTING PRONOUNCEMENTS AND OTHER

Basis of Presentation

We have prepared the condensed consolidated financial statements included herein pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures herein are adequate to ensure the information presented is not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2019.

We believe that all necessary adjustments, which consisted only of normal recurring items, have been included in the accompanying financial statements to present fairly the results of the interim periods. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for our fiscal year ending May 31, 2020.

During the first nine months of fiscal 2020, we adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). Topic 842 requires companies to generally recognize on the balance sheet, operating and financing lease liabilities and corresponding right-of-use (ROU) assets. We adopted this new standard using the effective date of June 1, 2019 as our initial application date. Consequently, financial information for the comparative periods was not updated. We elected the package of practical expedients permitted under the transition guidance of the new standard, which allows us to carry forward our historical lease classification. The adoption of Topic 842 did not result in a cumulative catch-up adjustment to the opening of the accumulated deficit balance as of June 1, 2019. There was no material impact to our condensed consolidated statements of operations and condensed consolidated statements of cash flows for the nine months ended February 29, 2020 due to the adoption of Topic 842. Except for the updates to our leases accounting policy noted below, there have been no other changes to our significant accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended May 31, 2019 that had a significant impact on our condensed consolidated financial statements or notes thereto as of and for the nine months ended February 29, 2020.

Leases

We determine if an arrangement is a lease at its inception. Operating lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments, because the implicit rate of the lease is generally not known. ROU assets related to our operating lease liabilities are measured at lease inception based on the initial measurement of the lease liability, plus any prepaid lease payments and less any lease incentives. Our lease terms that are used in determining our operating lease liabilities at lease inception may include options to extend or terminate the leases when it is reasonably certain that we will exercise such options. We amortize our ROU assets as operating lease expense generally on a straight-line basis over the lease term and classify both the lease amortization and imputed interest as operating expenses. We have lease agreements with lease and non-lease components, and in such cases, we generally account for the components as a single lease component.

We have operating leases that primarily relate to certain of our facilities, data centers and vehicles. As of February 29, 2020, our operating leases substantially have remaining terms of one year to twelve years, some of which include options to extend and/or terminate the leases. We do not recognize lease assets and lease liabilities for any lease with an original lease term of less than one year.

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 29, 2020

(Unaudited)

 

At February 29, 2020, ROU assets of $1.8 billion related to our operating leases are included in other non-current assets; and operating lease liabilities of $570 million are included in other current liabilities, and $1.3 billion are included in other non-current liabilities in our condensed consolidated balance sheet. Cash flow movements related to our lease activities are included in prepaid expenses and other assets and accounts payable and other liabilities as presented in net cash provided by operating activities in our condensed consolidated statement of cash flows for the nine months ended February 29, 2020.  

For the three and nine months ended February 29, 2020, operating lease expenses totaled $153 million and $451 million, respectively, net of sublease income of $4 million and $12 million, respectively. Cash paid for amounts included in the measurement of operating lease liabilities was $467 million for the nine months ended February 29, 2020. We recorded ROU assets of $2.3 billion in exchange for operating lease obligations during the nine months ended February 29, 2020, which included $1.9 billion for operating leases existing on June 1, 2019 that were recognized upon our initial adoption of Topic 842 and $383 million for operating leases that were contracted during the first nine months of fiscal 2020. As of February 29, 2020, the weighted average remaining lease term for operating leases was approximately five years and the weighted average discount rate used for calculating operating lease obligations was 3.2%.

Maturities of operating lease liabilities were as follows as of February 29, 2020 (in millions):

 

 

Remainder of fiscal 2020

 

$

178

 

Fiscal 2021

 

 

573

 

Fiscal 2022

 

 

455

 

Fiscal 2023

 

 

298

 

Fiscal 2024

 

 

193

 

Fiscal 2025

 

 

140

 

Thereafter

 

 

246

 

Total operating lease payments

 

 

2,083

 

Less: imputed interest

 

 

(179

)

Total operating lease liability

 

$

1,904

 

 

Remaining Performance Obligations from Contracts with Customers

Trade receivables, net of allowance for doubtful accounts, and deferred revenues are reported net of related uncollected deferred revenues in our condensed consolidated balance sheets as of February 29, 2020 and May 31, 2019. The revenues recognized during the nine months ended February 29, 2020 and February 28, 2019, respectively, that were included in the opening deferred revenues balance as of May 31, 2019 and 2018, respectively, were approximately $7.7 billion during each period. Revenues recognized from performance obligations satisfied in prior periods and impairment losses recognized on our receivables were immaterial in each of the three and nine months ended February 29, 2020 and February 28, 2019.  

Remaining performance obligations, as defined in Note 1 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2019, were $33.8 billion as of February 29, 2020, approximately 60% of which we expect to recognize as revenues over the next twelve months and the remainder thereafter.

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 29, 2020

(Unaudited)

 

Sales of Financing Receivables

We offer certain of our customers the option to acquire our software products, hardware products and services offerings through separate long-term payment contracts. We generally sell these contracts that we have financed for our customers on a non-recourse basis to financial institutions within 90 days of the contracts’ dates of execution. We record the transfers of amounts due from customers to financial institutions as sales of financing receivables because we are considered to have surrendered control of these financing receivables. Financing receivables sold to financial institutions were $284 million and $1.2 billion for the three and nine months ended February 29, 2020, respectively, and $274 million and $1.3 billion for the three and nine months ended February 28, 2019, respectively.

Cash, Cash Equivalents and Restricted Cash

Restricted cash that was included within cash and cash equivalents as presented within our condensed consolidated balance sheets as of February 29, 2020 and May 31, 2019 and our condensed consolidated statements of cash flows for the nine months ended February 29, 2020 and February 28, 2019 was nominal.

Acquisition Related and Other Expenses

Acquisition related and other expenses primarily consist of personnel related costs for transitional and certain other employees, integration related professional services, certain business combination adjustments including adjustments after the measurement period has ended and certain other operating items, net.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in millions)

 

February 29,

2020

 

 

February 28,

2019

 

 

February 29,

2020

 

 

February 28,

2019

 

Transitional and other employee related costs

 

$

2

 

 

$

13

 

 

$

9

 

 

$

39

 

Business combination adjustments, net

 

 

2

 

 

 

(20

)

 

 

4

 

 

 

(20

)

Other, net

 

 

3

 

 

 

3

 

 

 

31

 

 

 

10

 

Total acquisition related and other expenses

 

$

7

 

 

$

(4

)

 

$

44

 

 

$

29

 

Non-Operating Income, net

Non-operating income, net consists primarily of interest income, net foreign currency exchange losses, the noncontrolling interests in the net profits of our majority-owned subsidiaries (primarily Oracle Financial Services Software Limited and Oracle Corporation Japan), and net other income, including net realized gains and losses related to all of our investments, net unrealized gains and losses related to the small portion of our investment portfolio related to our deferred compensation plan, net unrealized gains and losses related to certain equity securities and non-service net periodic pension income (losses).

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(in millions)

 

February 29,

2020

 

 

February 28,

2019

 

 

February 29,

2020

 

 

February 28,

2019

 

Interest income

 

$

122

 

 

$

246

 

 

$

457

 

 

$

890

 

Foreign currency losses, net

 

 

(47

)

 

 

(13

)

 

 

(127

)

 

 

(68

)

Noncontrolling interests in income

 

 

(28

)

 

 

(35

)

 

 

(115

)

 

 

(106

)

Other loss, net

 

 

(43

)

 

 

—

 

 

 

(20

)

 

 

(35

)

Total non-operating income, net

 

$

4

 

 

$

198

 

 

$

195

 

 

$

681

 

 

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 29, 2020

(Unaudited)

 

Recent Accounting Pronouncements

Financial Instruments: In January 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (ASU 2020-01). ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. ASU 2020-01 is effective for us beginning in the first quarter of fiscal 2022, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2020-01 on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and also issued subsequent amendments to the initial guidance (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. We will adopt Topic 326 in our first quarter of fiscal 2021. We are currently evaluating the impact of our pending adoption of Topic 326 on our consolidated financial statements.

Income Taxes:  In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which is intended to simplify various areas related to the accounting for income taxes and improve consistent application of Topic 740. ASU 2019-12 is effective for us beginning in the first quarter of fiscal 2022, and earlier adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2019-12 on our consolidated financial statements.

 

2.

ACQUISITIONS

Fiscal 2020 and 2019 Acquisitions

During the first nine months of fiscal 2020 and full year of fiscal 2019, we acquired certain companies and purchased certain technology and development assets primarily to expand our products and services offerings. These acquisitions were not significant individually or in the aggregate to our condensed consolidated financial statements.

 

 

3.

FAIR VALUE MEASUREMENTS

We perform fair value measurements in accordance with FASB Accounting Standards Codification (ASC) 820, Fair Value Measurement. ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions and risk of nonperformance.

ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or a liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

 

•

Level 1:  quoted prices in active markets for identical assets or liabilities;

 

•

Level 2:  inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or

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ORACLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

February 29, 2020

(Unaudited)

 

 

•

Level 3:  unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Our assets and liabilities measured at fair value on a recurring basis consisted of the following (Level 1 and Level 2 inputs are defined above):

 

 

 

February 29, 2020

 

 

May 31, 2019

 

 

 

Fair Value Measurements

Using Input Types

 

 

 

 

 

 

Fair Value Measurements

Using Input Types

 

 

 

 

 

(in millions)

 

Level 1

 

 

Level 2

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities and other

 

$

—

 

 

$

2,514

 

 

$

2,514

 

 

$

4,899

 

 

$

17,343

 

 

$

22,242

 

Commercial paper debt securities

 

 

—

 

 

 

11,840

 

 

 

11,840