Microsoft 2006 Annual Report Download - page 35

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Cash Flows
Cash flow from operations for fiscal year 2006 decreased 13% to $14.40 billion primarily due to increased payments to fund a
$987 million increase in inventory and product costs related to Xbox 360 and increased payments to employees resulting from
a 16% growth in headcount. These factors were partially offset by increased cash receipts from customers driven by our 11%
revenue growth and $1.74 billion increase in unearned revenue. Cash used in financing was $20.56 billion in fiscal year 2006,
a decrease of $20.52 billion from the previous year driven by a $32.57 billion reduction in cash dividend payments. This impact
was partially offset by an $11.15 billion increase in common stock repurchases. Net cash from investing was $8.00 billion in
fiscal year 2006, a decrease of $7.02 billion from fiscal year 2005 driven primarily by an $8.93 billion decrease in cash from
combined purchase, sales, and maturities of investments and a $766 million increase in additions to property and equipment.
These factors were partially offset by $3.12 billion of cash proceeds from our securities lending program.
Cash flow from operations for fiscal year 2005 increased 14% to $16.61 billion primarily due to an increase in cash receipts
from customers driven by our 8% revenue growth combined with a 12% increase in unearned revenue. Cash payments in fiscal
year 2005 resulting from significant legal settlements were approximately $1.8 billion lower than in the previous year, adding to
the overall increase in operating cash flow. Partially offsetting these factors were increased payments to employees resulting
from a 7% increase in full-time employees. Cash used for financing was $41.08 billion in fiscal year 2005, driven by $36.11
billion of cash dividends paid in fiscal year 2005 compared to $1.73 billion paid in fiscal year 2004. The increase was also
partially driven by $8.06 billion in cash used for common stock repurchases, an increase of $4.67 billion in cash used for share
repurchases compared to the previous year, reflecting 312 million shares repurchased in fiscal year 2005, an increase of
188.5 million shares compared to the previous year. Net cash from investing was $15.03 billion in fiscal year 2005, an increase
of $18.37 billion from fiscal year 2004, primarily due to a $23.59 billion increase in investment maturities that occurred to fund
cash dividends paid in fiscal year 2005, partially offset by a $5.32 billion decrease in cash from combined investment purchase
and sale activity.
Cash flow from operations for fiscal year 2004 decreased $1.17 billion to $14.63 billion. The decrease primarily reflects the
combined cash outflows of $2.56 billion related to the Sun Microsystems settlement and the European Commission fine
partially offset by increased cash receipts from customers driven by the rise in revenue billings. Cash used for financing was
$2.36 billion in fiscal year 2004, a decrease of $2.86 billion from the previous year. The decrease reflects that we did not
repurchase common stock in the fourth quarter of fiscal year 2004 combined with a $628 million increase primarily from stock
issuances related to employee stock options exercises, partially offset by an $872 million increase in cash dividends paid. We
repurchased 123.7 million shares of common stock under our share repurchase program in fiscal year 2004. Cash used for
investing was $3.34 billion in fiscal year 2004, a decrease of $3.88 billion from fiscal year 2003.
We have no material long-term debt. Stockholders’ equity at June 30, 2006, was $40.10 billion. We will continue to invest in
sales, marketing, product support infrastructure, and existing and advanced areas of technology. Additions to property and
equipment will continue, including new facilities and computer systems for research and development, sales and marketing,
support, and administrative staff. Commitments for constructing new buildings were $234 million on June 30, 2006. We have
operating leases for most U.S. and international sales and support offices and certain equipment under which we incurred
rental expense totaling $276 million, $299 million, and $331 million fiscal year 2006, 2005 and 2004, respectively. We have
issued residual value guarantees in connection with various operating leases. These guarantees provide that if we do not
purchase the leased property from the lessor at the end of the lease term, then we are liable to the lessor for an amount equal
to the shortage (if any) between the proceeds from the sale of the property and an agreed value. As of June 30, 2006, the
maximum amount of the residual value guarantees was approximately $271 million. We believe that proceeds from the sale of
properties under operating leases would exceed the payment obligation and therefore no liability currently exists. We have not
engaged in any related party transactions or arrangements with unconsolidated entities or other persons that are reasonably
likely to materially affect liquidity or the availability of requirements for capital resources.
In fiscal year 2006, our Board of Directors declared $0.35 per share cash dividends, with $2.69 billion paid as of June 30,
2006. A quarterly dividend of $0.09 per share (or $906 million) was declared by our Board of Directors on June 21, 2006 to be
paid to shareholders of record as of August 17, 2006, on September 14, 2006.
On July 20, 2006, we announced the completion of the repurchase program initially approved by our Board of Directors on
July 20, 2004 to buy back up to $30 billion in Microsoft common stock. The repurchases were made using our cash resources.
During fiscal year 2006, we repurchased 754 million shares, or $19.75 billion, of our common stock under this plan. On July 20,
2006, we also announced that our Board of Directors authorized new share repurchase programs, comprised of a $20 billion