10-Q 1 fy13q210qdocument.htm 10-Q FY13 Q2 10Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-Q
R
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended January 31, 2013
OR
o
 
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the transition period from ____________ to ____________ .

Commission File Number 0-21180
INTUIT INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
 
77-0034661
(IRS employer identification no.)
 
2700 Coast Avenue, Mountain View, CA 94043
(Address of principal executive offices)
 
 
 
 
 
(650) 944-6000
(Registrant’s telephone number, including area code)
 

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 R No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer R
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 296,388,841 shares of Common Stock, $0.01 par value, were outstanding at February 22, 2013.
 



INTUIT INC.
FORM 10-Q
INDEX

 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-10.01
 EX-10.02
 EX-10.03
 EX-10.04
 EX-10.05
 EX-31.01
 EX-31.02
 EX-32.01
 EX-32.02
 EX-101.INS XBRL Instance Document
 EX-101.SCH XBRL Taxonomy Extension Schema
 EX-101.CAL XBRL Taxonomy Extension Calculation Linkbase
 EX-101.LAB XBRL Taxonomy Extension Label Linkbase
 EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase
 EX-101.DEF XBRL Taxonomy Extension Definition Linkbase

Intuit, the Intuit logo, QuickBooks, TurboTax, Lacerte, ProSeries, Quicken and Mint, among others, are registered trademarks and/or registered service marks of Intuit Inc., or one of its subsidiaries, in the United States and other countries. Other parties’ marks are the property of their respective owners.

2


PART I
ITEM 1
FINANCIAL STATEMENTS

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended
 
Six Months Ended
(In millions, except per share amounts)
January 31,
2013
 
January 31,
2012
 
January 31,
2013
 
January 31,
2012
Net revenue:
 
 
 
 
 
 
 
Product
$
402

 
$
419

 
$
629

 
$
641

Service and other
566

 
580

 
986

 
933

Total net revenue
968

 
999

 
1,615

 
1,574

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
Cost of product revenue
40

 
52

 
72

 
84

Cost of service and other revenue
162

 
150

 
307

 
282

Amortization of acquired technology
6

 
3

 
11

 
6

Selling and marketing
372

 
330

 
623

 
546

Research and development
179

 
164

 
357

 
327

General and administrative
109

 
95

 
207

 
187

Amortization of other acquired intangible assets
7

 
10

 
14

 
31

Total costs and expenses
875

 
804

 
1,591

 
1,463

Operating income from continuing operations
93

 
195

 
24

 
111

Interest expense
(7
)
 
(15
)
 
(15
)
 
(30
)
Interest and other income, net
1

 
3

 
3

 
14

Income before income taxes
87

 
183

 
12

 
95

Income tax provision (benefit)
16

 
62

 
(8
)
 
32

Net income from continuing operations
71

 
121

 
20

 
63

Net income (loss) from discontinued operations

 
(3
)
 
32

 
(9
)
Net income
$
71

 
$
118

 
$
52

 
$
54

 
 
 
 
 
 
 
 
Basic net income per share from continuing operations
$
0.24

 
$
0.41

 
$
0.07

 
$
0.21

Basic net income (loss) per share from discontinued operations

 
(0.01
)
 
0.11

 
(0.03
)
Basic net income per share
$
0.24

 
$
0.40

 
$
0.18

 
$
0.18

Shares used in basic per share calculations
296

 
297

 
296

 
298

 
 
 
 
 
 
 
 
Diluted net income per share from continuing operations
$
0.23

 
$
0.40

 
$
0.07

 
$
0.21

Diluted net income (loss) per share from discontinued operations

 
(0.01
)
 
0.10

 
(0.03
)
Diluted net income per share
$
0.23

 
$
0.39

 
$
0.17

 
$
0.18

Shares used in diluted per share calculations
303

 
306

 
302

 
307

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.17

 
$
0.15

 
$
0.34

 
$
0.30

See accompanying notes.


3


INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
Three Months Ended
 
Six Months Ended
(In millions)
January 31,
2013
 
January 31,
2012
 
January 31,
2013
 
January 31,
2012
 
 
 
 
 
 
 
 
Net income
$
71

 
$
118

 
$
52

 
$
54

Other comprehensive income (loss), net of income taxes:
 
 
 
 
 
 
 
Unrealized losses on available-for-sale debt securities

 

 

 
(1
)
Unrealized gains on available-for-sale equity securities

 

 
3

 

Foreign currency translation gains (losses)

 

 
1

 
(5
)
Total other comprehensive income (loss), net

 

 
4

 
(6
)
Comprehensive income
$
71

 
$
118

 
$
56

 
$
48



See accompanying notes.

4



INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
January 31,
2013
 
July 31,
2012
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
399

 
$
393

Investments
279

 
351

Accounts receivable, net
541

 
183

Income taxes receivable
157

 
53

Deferred income taxes
142

 
184

Prepaid expenses and other current assets
110

 
69

Current assets before funds held for customers
1,628

 
1,233

Funds held for customers
284

 
290

Total current assets
1,912

 
1,523

Long-term investments
88

 
75

Property and equipment, net
599

 
567

Goodwill
2,191

 
2,200

Acquired intangible assets, net
187

 
213

Other assets
112

 
106

Total assets
$
5,089

 
$
4,684

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
213

 
$
157

Accrued compensation and related liabilities
183

 
231

Deferred revenue
649

 
443

Other current liabilities
267

 
144

Current liabilities before customer fund deposits
1,312

 
975

Customer fund deposits
284

 
290

Total current liabilities
1,596

 
1,265

Long-term debt
499

 
499

Other long-term obligations
202

 
176

Total liabilities
2,297

 
1,940

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock and additional paid-in capital
3,186

 
3,018

Treasury stock, at cost
(4,986
)
 
(4,911
)
Accumulated other comprehensive income
29

 
25

Retained earnings
4,563

 
4,612

Total stockholders’ equity
2,792

 
2,744

Total liabilities and stockholders’ equity
$
5,089

 
$
4,684


See accompanying notes.


5


INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

(In millions, except shares in thousands)
Shares of
Common
Stock
 
Common
Stock and
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2012
295,289

 
$
3,018

 
$
(4,911
)
 
$
25

 
$
4,612

 
$
2,744

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
52

 
52

Other comprehensive income, net of income taxes

 

 

 
4

 

 
4

Comprehensive income
 
 
 
 
 
 
 
 
 
 
56

Issuance of treasury stock under employee stock plans
4,814

 
16

 
125

 

 

 
141

Tax benefit from share-based compensation plans

 
56

 

 

 

 
56

Stock repurchases under stock repurchase programs
(3,361
)
 

 
(200
)
 

 

 
(200
)
Cash dividends declared ($0.34 per share)

 

 

 

 
(101
)
 
(101
)
Share-based compensation expense

 
96

 

 

 

 
96

Balance at January 31, 2013
296,742

 
$
3,186

 
$
(4,986
)
 
$
29

 
$
4,563

 
$
2,792


(In millions, except shares in thousands)
Shares of
Common
Stock
 
Common
Stock and
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2011
300,597

 
$
2,886

 
$
(4,316
)
 
$
15

 
$
4,031

 
$
2,616

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
54

 
54

Other comprehensive loss, net of income taxes

 

 

 
(6
)
 

 
(6
)
Comprehensive income
 
 
 
 
 
 
 
 
 
 
48

Issuance of treasury stock under employee stock plans
5,590

 
(39
)
 
150

 

 
(5
)
 
106

Tax benefit from share-based compensation plans

 
45

 

 

 

 
45

Stock repurchases under stock repurchase programs
(11,411
)
 

 
(586
)
 

 

 
(586
)
Cash dividends declared ($0.30 per share)

 

 

 

 
(89
)
 
(89
)
Share-based compensation expense

 
83

 

 

 

 
83

Balance at January 31, 2012
294,776

 
$
2,975

 
$
(4,752
)
 
$
9

 
$
3,991

 
$
2,223



See accompanying notes.

6


INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
Six Months Ended
(In millions)
January 31,
2013
 
January 31,
2012
 
January 31,
2013
 
January 31,
2012
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
71

 
$
118

 
$
52

 
$
54

 Adjustments to reconcile net income to net cash provided by
 operating activities:
 
 
 
 
 
 
 
Depreciation
42

 
44

 
82

 
88

Amortization of acquired intangible assets
16

 
17

 
30

 
45

Share-based compensation expense
47

 
43

 
96

 
83

Pre-tax gain on sale of discontinued operations

 

 
(53
)
 

Deferred income taxes
(5
)
 
(12
)
 
48

 
(17
)
Tax benefit from share-based compensation plans
12

 
15

 
56

 
45

Excess tax benefit from share-based compensation plans
(12
)
 
(14
)
 
(56
)
 
(43
)
Other
5

 
8

 
9

 
2

Total adjustments
105

 
101

 
212

 
203

Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable
(357
)
 
(426
)
 
(358
)
 
(421
)
Prepaid expenses, income taxes receivable and other assets
(17
)
 
60

 
(145
)
 
(18
)
Accounts payable
46

 
45

 
58

 
84

Accrued compensation and related liabilities
48

 
27

 
(48
)
 
(47
)
Deferred revenue
233

 
207

 
217

 
182

Income taxes payable
1

 

 
1

 
1

Other liabilities
126

 
128

 
122

 
112

Total changes in operating assets and liabilities
80

 
41

 
(153
)
 
(107
)
Net cash provided by operating activities
256

 
260

 
111

 
150

Cash flows from investing activities:
 
 
 
 
 
 
 
Purchases of available-for-sale debt securities
(123
)
 
(146
)
 
(210
)
 
(343
)
Sales of available-for-sale debt securities
109

 
130

 
190

 
266

Maturities of available-for-sale debt securities
74

 
48

 
95

 
89

Net change in money market funds and other cash equivalents held
 to satisfy customer fund obligations
(75
)
 
(9
)
 
6

 
84

Net change in customer fund deposits
75

 
9

 
(6
)
 
(84
)
Purchases of property and equipment
(45
)
 
(48
)
 
(115
)
 
(92
)
Proceeds from divestiture of businesses

 

 
60

 

Other
(17
)
 
1

 
(22
)
 
15

Net cash used in investing activities
(2
)
 
(15
)
 
(2
)
 
(65
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Net proceeds from issuance of treasury stock under
 employee stock plans
68

 
61

 
141

 
106

Purchases of treasury stock
(100
)
 
(331
)
 
(200
)
 
(586
)
Cash dividends paid to stockholders
(51
)
 
(44
)
 
(101
)
 
(89
)
Excess tax benefit from share-based compensation plans
12

 
14

 
56

 
43

Net cash used in financing activities
(71
)
 
(300
)
 
(104
)
 
(526
)
Effect of exchange rates on cash and cash equivalents

 
(1
)
 
1

 
(4
)
Net increase (decrease) in cash and cash equivalents
183

 
(56
)
 
6

 
(445
)
Cash and cash equivalents at beginning of period
216

 
333

 
393

 
722

Cash and cash equivalents at end of period
$
399

 
$
277

 
$
399

 
$
277


See accompanying notes.

7


INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.
Description of Business and Summary of Significant Accounting Policies
Description of Business
Intuit Inc. provides business and financial management solutions for small businesses, consumers, accounting professionals and financial institutions. With flagship products and services that include QuickBooks, TurboTax and Quicken, we help customers solve important financial management problems, such as running a small business, paying bills, filing income tax returns, and managing personal finances. ProSeries and Lacerte are Intuit’s tax preparation offerings for professional accountants. Our Financial Services business provides digital banking solutions to banks and credit unions. Incorporated in 1984 and headquartered in Mountain View, California, we sell our products and services primarily in the United States.
Basis of Presentation
These condensed consolidated financial statements include the financial statements of Intuit and its wholly owned subsidiaries. We have eliminated all significant intercompany balances and transactions in consolidation. We have included all adjustments, consisting only of normal recurring items, which we considered necessary for a fair presentation of our financial results for the interim periods presented.
We acquired Demandforce, Inc. in May 2012 and we have included the results of operations for that business in our consolidated results of operations from the date of acquisition. As discussed in Note 4, we sold our Intuit Websites business in September 2012. We have reclassified our financial statements for all periods prior to the sale to reflect that business as discontinued operations. Unless noted otherwise, discussions in these notes pertain to our continuing operations.
These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2012. Results for the six months ended January 31, 2013 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2013 or any other future period.
Seasonality
Our QuickBooks, Consumer Tax and Accounting Professionals businesses are highly seasonal. Revenue from our QuickBooks software products tends to be highest during our second and third fiscal quarters. Sales of income tax preparation products and services are heavily concentrated in the period from November through April. Seasonal patterns mean that our total net revenue is usually highest during our second quarter ending January 31 and third quarter ending April 30. We typically report losses in our first quarter ending October 31 and fourth quarter ending July 31. During these quarters, revenue from our tax businesses is minimal while core operating expenses such as research and development continue at relatively consistent levels.
Significant Accounting Policies
We describe our significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2012. There have been no changes to our significant accounting policies during the first six months of fiscal 2013.
Computation of Net Income (Loss) Per Share
We compute basic net income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares include shares issuable upon the exercise of stock options and upon the vesting of restricted stock units (RSUs) under the treasury stock method.
We include stock options with combined exercise prices, unrecognized compensation expense and tax benefits that are less than the average market price for our common stock, and RSUs with unrecognized compensation expense and tax benefits that are less than the average market price for our common stock, in the calculation of diluted net income per share. We exclude stock options with combined exercise prices, unrecognized compensation expense and tax benefits that are greater than the average market price for our common stock, and RSUs with unrecognized compensation expense and tax benefits that are greater than the average market price for our common stock, from the calculation of diluted net income per share because their effect is anti-dilutive. Under the treasury stock method, the amount that must be paid to exercise stock options, the amount of compensation expense for future service that we have not yet recognized for stock options and RSUs, and the amount of tax benefits that will be recorded in additional paid-in capital when the awards become deductible are assumed to be used to repurchase shares.

8


In loss periods, basic net loss per share and diluted net loss per share are the same since the effect of potential common shares is anti-dilutive and therefore excluded.
The following table presents the composition of shares used in the computation of basic and diluted net income per share for the periods indicated.
 
Three Months Ended
 
Six Months Ended
(In millions, except per share amounts)
January 31,
2013
 
January 31,
2012
 
January 31,
2013
 
January 31,
2012
Numerator:
 
 
 
 
 
 
 
Net income from continuing operations
$
71

 
$
121

 
$
20

 
$
63

Net income (loss) from discontinued operations

 
(3
)
 
32

 
(9
)
Net income
$
71

 
$
118

 
$
52

 
$
54

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Shares used in basic per share amounts:
 
 
 
 
 
 
 
Weighted average common shares outstanding
296

 
297

 
296

 
298

 
 
 
 
 
 
 
 
Shares used in diluted per share amounts:
 
 
 
 
 
 
 
Weighted average common shares outstanding
296

 
297

 
296

 
298

Dilutive common equivalent shares from stock options
 
 
 
 
 
 
 
and restricted stock awards
7

 
9

 
6

 
9

Dilutive weighted average common shares outstanding
303

 
306

 
302

 
307

 
 
 
 
 
 
 
 
Basic and diluted net income per share:
 
 
 
 
 
 
 
Basic net income per share from continuing operations
$
0.24

 
$
0.41

 
$
0.07

 
$
0.21

Basic net income (loss) per share from discontinued operations

 
(0.01
)
 
0.11

 
(0.03
)
Basic net income per share
$
0.24

 
$
0.40

 
$
0.18

 
$
0.18

 
 
 
 
 
 
 
 
Diluted net income per share from continuing operations
$
0.23

 
$
0.40

 
$
0.07

 
$
0.21

Diluted net income (loss) per share from discontinued operations

 
(0.01
)
 
0.10

 
(0.03
)
Diluted net income per share
$
0.23

 
$
0.39

 
$
0.17

 
$
0.18

 
 
 
 
 
 
 
 
Shares excluded from computation of diluted net income
per share:
 
 
 
 
 
 
 
Weighted average stock options and restricted stock units excluded from computation due to anti-dilutive effect
3

 
3

 
3

 
3

Concentration of Credit Risk and Significant Customers
No customer accounted for 10% or more of total net revenue in the three or six months ended January 31, 2013 or January 31, 2012. Due to the seasonality of our small business, consumer tax and personal finance offerings, one customer accounted for 13% of gross accounts receivable at January 31, 2013. No customer accounted for 10% or more of gross accounts receivable at July 31, 2012.
Recent Accounting Pronouncements
ASU 2013-02, "Comprehensive Income (Topic 220)"
In February 2013 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This update amends Accounting Standards Codification (ASC) Topic 220, “Comprehensive Income,” to require reporting entities to provide information about the amounts reclassified from accumulated other comprehensive income by component. In addition, reporting entities will be required to present, either on the face of the statement of operations or in the footnotes to the financial statements, significant amounts reclassified from accumulated other comprehensive income by statement of operations line item. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012, which

9


means that it will be effective for our fiscal quarter beginning February 1, 2013. We do not believe that adoption of ASU 2013-02 will have a significant impact on our consolidated financial statements.
 
2.
Fair Value Measurements
The authoritative guidance defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, we consider the principal or most advantageous market for an asset or liability and assumptions that market participants would use when pricing the asset or liability. In addition, we consider and use all valuation methods that are appropriate in estimating the fair value of an asset or liability.
The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In general, the authoritative guidance requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by the authoritative guidance are as follows:
Level 1 uses unadjusted quoted prices that are available in active markets for identical assets or liabilities.
Level 2 uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include 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; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data for substantially the full term of the assets or liabilities.
Level 3 uses one or more significant inputs that are supported by little or no market activity and that are significant to the determination of fair value. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes financial assets and financial liabilities that we measured at fair value on a recurring basis at the dates indicated, classified in accordance with the fair value hierarchy described above.

 
January 31, 2013
 
July 31, 2012
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents, primarily money market funds
$
325

 
$

 
$

 
$
325

 
$
333

 
$

 
$

 
$
333

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds

 
206

 

 
206

 

 
260

 

 
260

Municipal auction rate securities

 

 
33

 
33

 

 

 
41

 
41

Corporate notes

 
143

 

 
143

 

 
142

 

 
142

U.S. agency securities

 
105

 

 
105

 

 
124

 

 
124

Available-for-sale corporate equity securities
37

 

 

 
37

 
33

 

 

 
33

Total available-for-sale securities
37

 
454

 
33

 
524

 
33

 
526

 
41

 
600

Total assets measured at fair value on a recurring basis
$
362

 
$
454

 
$
33

 
$
849

 
$
366

 
$
526

 
$
41

 
$
933

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes (1)
$

 
$
621

 
$

 
$
621

 
$

 
$
582

 
$

 
$
582

______________________________
(1)
Carrying value on our balance sheet at January 31, 2013 was $499 million and at July 31, 2012 was $499 million. See Note 6.

10


The following table summarizes our cash equivalents and available-for-sale debt and equity securities by balance sheet classification and level in the fair value hierarchy at the dates indicated.

 
January 31, 2013
 
July 31, 2012
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In cash and cash equivalents
$
216

 
$

 
$

 
$
216

 
$
219

 
$

 
$

 
$
219

In funds held for customers
109

 

 

 
109

 
114

 

 

 
114

Total cash equivalents
$
325

 
$

 
$

 
$
325

 
$
333

 
$

 
$

 
$
333

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In investments
$

 
$
279

 
$

 
$
279

 
$

 
$
351

 
$

 
$
351

In funds held for customers

 
175

 

 
175

 

 
175

 

 
175

In long-term investments
37

 

 
33

 
70

 
33

 

 
41

 
74

Total available-for-sale securities
$
37

 
$
454

 
$
33

 
$
524

 
$
33

 
$
526

 
$
41

 
$
600



We value our Level 1 assets, consisting primarily of money market funds, using quoted prices in active markets for identical instruments. Financial assets whose fair values we measure on a recurring basis using Level 2 inputs consist of municipal bonds, corporate notes and U.S. agency securities. We measure the fair values of these assets with the help of a pricing service that either provides quoted market prices in active markets for identical or similar securities or uses observable inputs for their pricing without applying significant adjustments. Our fair value processes include controls that are designed to ensure that we record appropriate fair values for our Level 2 investments. These controls include comparison to pricing provided by a secondary pricing service or investment manager, validation of pricing sources and models, review of key model inputs, analysis of period-over-period price fluctuations, and independent recalculation of prices where appropriate.
Financial liabilities whose fair values we measure using Level 2 inputs consist of debt. See Note 6, “Long-Term Obligations,” for more information. We measure the fair value of our senior notes based on their trading prices and the interest rates we could obtain for other borrowings with similar terms.
Financial assets whose fair values we measure using significant unobservable (Level 3) inputs consist of municipal auction rate securities that are no longer liquid. There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the six months ended January 31, 2013.
The following table presents a reconciliation of activity for our Level 3 assets for the six months ended January 31, 2013.

 
Six Months
 
Ended
(In millions)
January 31,
2013
Beginning balance
$
41

Settlements at par
(8
)
Ending balance
$
33



We estimated the fair values of these municipal auction rate securities at January 31, 2013 and July 31, 2012 using a discounted cash flow model whose key inputs included the projected future interest rates; the likely timing of principal repayments; publicly available pricing data for recently issued student loan backed securities that are not subject to auctions; and the impact of the reduced liquidity for auction rate securities. Any significant changes in the inputs to the model may have a significant impact on the estimated fair values of these securities.

Using our discounted cash flow model we determined that the fair values of the municipal auction rate securities we held at January 31, 2013 were approximately equal to their par values. As a result, we recorded no decrease in the fair values of those securities for the six months then ended. These securities are included in long-term investments on our balance sheets at

11


January 31, 2013 and July 31, 2012 based on the maturities of the underlying securities at those dates. We do not intend to sell our municipal auction rate securities and it is not more likely than not that we will be required to sell them before recovery at par, which may be at maturity. Based on our expected operating cash flows and our other sources of cash, we do not believe that the reduction in liquidity of our municipal auction rate securities will have a material impact on our overall ability to meet our liquidity needs.


3.
Cash and Cash Equivalents, Investments and Funds Held for Customers
We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of AAA-rated money market funds in all periods presented. Investments consist of available-for-sale investment-grade debt securities that we carry at fair value. Funds held for customers consist of cash and cash equivalents and investment grade available-for-sale debt securities. Long-term investments consist primarily of illiquid municipal auction rate securities and an available-for-sale corporate equity investment that we intend to hold for more than twelve months, both of which we carry at fair value. See Note 2, “Fair Value Measurements,” for more information. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market funds, we diversify our investments in debt securities by limiting our holdings with any individual issuer.
The following table summarizes our cash and cash equivalents, investments and funds held for customers by balance sheet classification at the dates indicated.

 
January 31, 2013
 
July 31, 2012
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Classification on balance sheets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
399

 
$
399

 
$
393

 
$
393

Investments
279

 
279

 
350

 
351

Funds held for customers
284

 
284

 
289

 
290

Long-term investments
55

 
88

 
47

 
75

Total cash and cash equivalents, investments, and funds
held for customers
$
1,017

 
$
1,050

 
$
1,079

 
$
1,109


The following table summarizes our cash and cash equivalents, investments and funds held for customers by investment category at the dates indicated.

 
January 31, 2013
 
July 31, 2012
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Type of issue:
 
 
 
 
 
 
 
Total cash and cash equivalents
$
509

 
$
509

 
$
508

 
$
508

Available-for-sale debt securities:
 
 
 
 
 
 
 
Municipal bonds
206

 
206

 
259

 
260

Municipal auction rate securities
33

 
33

 
41

 
41

Corporate notes
142

 
143

 
141

 
142

U.S. agency securities
105

 
105

 
124

 
124

Total available-for-sale debt securities
486

 
487

 
565

 
567

Available-for-sale corporate equity securities
5

 
37

 
5

 
33

Other long-term investments
17

 
17

 
1

 
1

Total cash and cash equivalents, investments, and funds
held for customers
$
1,017

 
$
1,050

 
$
1,079

 
$
1,109




12


We use the specific identification method to compute gains and losses on investments. We include realized gains and losses on our available-for-sale debt securities in interest and other income, net in our statements of operations. Gross realized gains and losses on our available-for-sale debt securities for the six months ended January 31, 2013 and January 31, 2012 were not significant.
We accumulate unrealized gains and losses on our available-for-sale debt and equity securities, net of income taxes, in accumulated other comprehensive income in the stockholders’ equity section of our balance sheets. Gross unrealized gains and losses on our available-for-sale debt securities at January 31, 2013 and July 31, 2012 were not significant. The cumulative gross unrealized gain on our available-for-sale corporate equity security was approximately $33 million at January 31, 2013.
We periodically review our investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. We believe that the investments we held at January 31, 2013 were not other-than-temporarily impaired. Unrealized losses at January 31, 2013 were not significant and were due to changes in interest rates, including market credit spreads, and not due to increased credit risks associated with specific securities. We do not intend to sell these investments and it is not more likely than not that we will be required to sell them before recovery at par, which may be at maturity.
The following table summarizes our available-for-sale debt securities classified by the stated maturity date of the security at the dates indicated.

 
January 31, 2013
 
July 31, 2012
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due within one year
$
191

 
$
191

 
$
218

 
$
218

Due within two years
132

 
133

 
134

 
135

Due within three years
92

 
92

 
131

 
132

Due after three years
71

 
71

 
82

 
82

Total available-for-sale debt securities
$
486

 
$
487

 
$
565

 
$
567


Available-for-sale debt securities due after three years in the table above include our municipal auction rate securities. See Note 2, “Fair Value Measurements,” for more information. All of the remaining securities in that category had effective maturities of three years or less due to interest reset dates or mandatory call dates.


4.
Discontinued Operations

On September 17, 2012 we sold our Intuit Websites business, which was a component of our Financial Management Solutions reporting segment, for approximately $60 million in cash and recorded a gain on disposal of approximately $32 million, net of income taxes.
We have segregated the operating results of Intuit Websites from continuing operations in our statements of operations for all periods prior to the sale. Net revenue from Intuit Websites was $9 million for the six months ended January 31, 2013. Net revenue from Intuit Websites was $19 million for the three months ended January 31, 2012 and $38 million for the six months ended January 31, 2012.
Net assets held for sale at July 31, 2012 consisted primarily of operating assets and liabilities that were not material, so we have not segregated them on our balance sheets. Because operating cash flows from the Intuit Websites business were also not material for any period presented, we have not segregated them from continuing operations on our statements of cash flows.


5.
Current Liabilities
Unsecured Revolving Credit Facility
On February 17, 2012 we entered into an agreement with certain institutional lenders for a $500 million unsecured revolving credit facility that will expire on February 17, 2017. Advances under the credit facility will accrue interest at rates that are equal to, at our election, either JP Morgan's alternate base rate plus a margin that ranges from 0.0% to 0.5% or LIBOR plus a margin that ranges from 0.9% to 1.5%. Actual margins under either election will be based on our senior debt credit ratings. The agreement includes customary affirmative and negative covenants, including financial covenants that require us to maintain a

13


ratio of total debt to annual earnings before interest, taxes, depreciation and amortization (EBITDA) of not greater than 3.25 to 1.00 as of any date and a ratio of annual EBITDA to interest payable of not less than 3.00 to 1.00 as of the last day of each fiscal quarter. We remained in compliance with these covenants at all times during the quarter ended January 31, 2013. We may use amounts borrowed under this credit facility for general corporate purposes, including future acquisitions. To date we have not borrowed under this credit facility.
Other Current Liabilities
Other current liabilities were as follows at the dates indicated:

(In millions)
January 31,
2013
 
July 31,
2012
Reserve for product returns
$
85

 
$
19

Reserve for rebates
58

 
17

Current portion of license fee payable
10

 
10

Current portion of deferred rent
8

 
8

Interest payable
10

 
10

Executive deferred compensation plan liabilities
60

 
56

Other
36

 
24

Total other current liabilities
$
267

 
$
144


The balances of several of our other current liabilities, particularly our reserves for product returns and rebates, are affected by the seasonality of our business. See Note 1, “Description of Business and Summary of Significant Accounting Policies - Seasonality,” for more information.


6.
Long-Term Obligations
Long-Term Debt
On March 12, 2007 we issued $500 million of 5.40% senior unsecured notes due on March 15, 2012 (the 2012 Notes) and $500 million of 5.75% senior unsecured notes due on March 15, 2017 (the 2017 Notes) (together, the Notes), for a total principal amount of $1 billion. In March 2012 we repaid the 2012 Notes when they became due using cash from operations. We carried the 2017 Notes at face value less the unamortized discount in long-term debt on our balance sheets at January 31, 2013 and July 31, 2012. The 2017 Notes are redeemable by Intuit at any time, subject to a make-whole premium, and include covenants that limit our ability to grant liens on our facilities and to enter into sale and leaseback transactions, subject to significant allowances. We paid $14 million in cash for interest on the Notes during the six months ended January 31, 2013 and $28 million during the six months ended January 31, 2012.
Other Long-Term Obligations
Other long-term obligations were as follows at the dates indicated:

(In millions)
January 31,
2013
 
July 31,
2012
Total license fee payable
$
56

 
$
54

Total deferred rent
55

 
53

Long-term deferred revenue
45

 
42

Long-term income tax liabilities
43

 
41

Long-term deferred income tax liabilities
15

 

Other
7

 
5

Total long-term obligations
221

 
195

Less current portion (included in other current liabilities)
(19
)
 
(19
)
Long-term obligations due after one year
$
202

 
$
176




14


7.
Income Taxes
Effective Tax Rate
We compute our provision for or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and adding the effects of any discrete income tax items specific to the period.
In January 2013 the American Taxpayer Relief Act of 2012 was signed into law. The Act includes a reinstatement of the federal research and experimentation credit through December 31, 2013 that was retroactive to January 1, 2012. We recorded a discrete tax benefit of approximately $12 million for the retroactive effect during the three months ended January 31, 2013.
Our effective tax rate for the three months ended January 31, 2013 was approximately 18% and we recorded an $8 million tax benefit on pretax income of $12 million for the six months ended January 31, 2013. Excluding discrete tax benefits primarily related to the reinstatement of the federal research and experimentation credit, our effective tax rate for the three and six months ended January 31, 2013 was approximately 33% and did not differ significantly from the federal statutory rate of 35%. The benefits we received from the domestic production activities deduction and the federal research and experimentation credit were substantially offset by state income taxes in both periods.
Our effective tax rates for the three and six months ended January 31, 2012 were approximately 34% and 33% and did not differ significantly from the federal statutory rate of 35%. The benefits we received from the domestic production activities deduction and the federal research and experimentation credit were substantially offset by state income taxes in both periods.
Unrecognized Tax Benefits and Other Considerations
The total amount of our unrecognized tax benefits at July 31, 2012 was $38 million. Net of related deferred tax assets, unrecognized tax benefits were $28 million at that date. If we were to recognize these net benefits, our income tax expense would reflect a favorable net impact of $28 million. There were no material changes to these amounts during the six months ended January 31, 2013. We do not believe that it is reasonably possible that there will be a significant increase or decrease in our unrecognized tax benefits over the next 12 months.


8.
Stockholders’ Equity
Stock Repurchase Programs
Intuit’s Board of Directors has authorized a series of common stock repurchase programs. Shares of common stock repurchased under these programs become treasury shares. We repurchased 3.4 million shares for $200 million under these programs during the six months ended January 31, 2013 and 11.4 million shares for $586 million under these programs during the six months ended January 31, 2012. At January 31, 2013, we had authorization from our Board of Directors to expend up to an additional $1.5 billion for stock repurchases through August 15, 2014. Future stock repurchases under the current program are at the discretion of management, and authorization of future stock repurchase programs is subject to the final determination of our Board of Directors.
Repurchased shares of our common stock are held as treasury shares until they are reissued or retired. When we reissue treasury stock, if the proceeds from the sale are more than the average price we paid to acquire the shares we record an increase in additional paid-in capital. Conversely, if the proceeds from the sale are less than the average price we paid to acquire the shares, we record a decrease in additional paid-in capital to the extent of increases previously recorded for similar transactions and a decrease in retained earnings for any remaining amount.
Dividends on Common Stock
During the six months ended January 31, 2013 we declared and paid quarterly cash dividends of $0.34 per share of outstanding common stock that totaled approximately $101 million. In February 2013 our Board of Directors declared a quarterly cash dividend of $0.17 per share of outstanding common stock payable on April 18, 2013 to stockholders of record at the close of business on April 10, 2013. Future declarations of dividends and the establishment of future record dates and payment dates are subject to the final determination of our Board of Directors.

15


Share-Based Compensation Expense
The following table summarizes the total share-based compensation expense that we recorded for the periods shown.
 
Three Months Ended
 
Six Months Ended
(In millions, except per share amounts)
January 31,
2013
 
January 31,
2012
 
January 31,
2013
 
January 31,
2012
Cost of revenue
$
2

 
$
2

 
$
4

 
$
3

Selling and marketing
17

 
15

 
35

 
29

Research and development
14

 
14

 
28

 
26

General and administrative
14

 
12

 
29

 
25

Total share-based compensation expense
47

 
43

 
96

 
83

Income tax benefit
(16
)
 
(14
)
 
(32
)
 
(27
)
Decrease in net income
$
31

 
$
29

 
$
64

 
$
56

Decrease in net income per share:
 
 
 
 

 

Basic
$
0.10

 
$
0.10

 
$
0.22

 
$
0.19

Diluted
$
0.10

 
$
0.09

 
$
0.21

 
$
0.18



Share-Based Awards Available for Grant
A summary of share-based awards available for grant under our 2005 Equity Incentive Plan for the six months ended January 31, 2013 was as follows:
(Shares in thousands)
Shares
Available
for Grant
Balance at July 31, 2012
21,760

Options granted
(106
)
Restricted stock units granted (1)
(901
)
Share-based awards canceled/forfeited/expired (1)(2)
1,399

Balance at January 31, 2013
22,152

________________________________
(1)
Under the terms of our Amended and Restated 2005 Equity Incentive Plan, as amended through July 24, 2012 (2005 Equity Incentive Plan), RSUs granted from the pool of shares available for grant on or after November 1, 2010 reduce the pool by 2.3 shares for each share granted. RSUs forfeited and returned to the pool of shares available for grant increase the pool by 2.3 shares for each share forfeited.
(2)
Stock options and restricted stock units canceled, expired or forfeited under our 2005 Equity Incentive Plan, are returned to the pool of shares available for grant. Stock options and restricted stock units canceled, expired or forfeited under older expired plans are not returned to the pool of shares available for grant.

16


Stock Option Activity and Related Share-Based Compensation Expense
A summary of stock option activity for the six months ended January 31, 2013 was as follows:
 
Options Outstanding
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Exercise
Price
Per Share
Balance at July 31, 2012
18,061

 
$
37.49

Options granted
106

 
60.30

Options exercised
(3,880
)
 
32.37

Options canceled or expired
(336
)
 
40.67

Balance at January 31, 2013
13,951

 
$
39.02

 
 
 
 
Exercisable at January 31, 2013
8,620

 
$
32.68


At January 31, 2013, there was approximately $53 million of unrecognized compensation cost related to non-vested stock options that we expect to recognize as expense in the future. We will adjust unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average vesting period of 2.0 years.
Restricted Stock Unit Activity and Related Share-Based Compensation Expense
A summary of restricted stock unit activity for the six months ended January 31, 2013 was as follows:
 
Restricted Stock Units
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested at July 31, 2012
9,607

 
$
46.79

Granted
392

 
60.30

Vested
(875
)
 
34.80

Forfeited
(511
)
 
47.08

Nonvested at January 31, 2013
8,613

 
$
48.61


At January 31, 2013, there was approximately $216 million of unrecognized compensation cost related to non-vested RSUs and restricted stock that we expect to recognize as expense in the future. We will adjust unrecognized compensation cost for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average vesting period of 2.1 years.


9.
Litigation
On January 13, 2012, two putative class actions were filed against Intuit Inc. in connection with our TurboTax income tax preparation software: Smith v. Intuit Inc. (U.S. District Court, Northern District of California) and Quildon v. Intuit Inc. (California Superior Court, Santa Clara County). The plaintiffs in both cases had asserted that the fees charged for the refund processing service offered within TurboTax are “refund anticipation loans” and the disclosures about those fees do not comply with California and federal laws. The Smith case was brought in federal court on behalf of a proposed nationwide class and subclasses; the Quildon case was brought in state court on behalf of a proposed California class and subclasses. In January 2013, for the purposes of settlement and without any admission of wrongdoing or liability, Intuit reached an agreement in principle to resolve all claims raised in the Smith and Quildon matters for an amount that is not material to our consolidated financial statements. We accrued that amount in the second quarter of fiscal 2013. The terms of the proposed settlement are subject to the approval of the court, which could approve, reject, or suggest modifications to those terms. We currently believe that the likelihood of a material change to the proposed settlement amount is remote.
Intuit is subject to certain routine legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business, including assertions that we may be infringing patents or other intellectual property rights of others. We currently believe that, in addition to any amounts accrued, the amount of potential losses, if any, for any pending claims of any type (either alone or combined) will not have a material impact on our consolidated financial statements. The

17


ultimate outcome of any litigation is uncertain and, regardless of outcome, litigation can have an adverse impact on Intuit because of defense costs, negative publicity, diversion of management resources and other factors. Our failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims could adversely affect our business.


10.
Segment Information
We have defined seven reportable segments based on factors such as how we manage our operations and how our chief operating decision maker views results. We define the chief operating decision maker as our Chief Executive Officer and our Chief Financial Officer. Our chief operating decision maker organizes and manages our business primarily on the basis of product and service offerings.
All of our business segments except Other Businesses operate primarily in the United States and sell primarily to customers in the United States. International total net revenue was less than 5% of consolidated total net revenue for all periods presented.
We include expenses such as corporate selling and marketing, product development, and general and administrative expenses and share-based compensation expenses that are not allocated to specific segments in unallocated corporate items. Unallocated corporate items also include amortization of acquired technology, amortization of other acquired intangible assets, and goodwill and intangible asset impairment charges.
The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2012. Except for goodwill and purchased intangible assets, we do not generally track assets by reportable segment and, consequently, we do not disclose total assets by reportable segment.

18


The following table shows our financial results by reportable segment for the periods indicated. Results for our Financial Management Solutions segment have been adjusted for all periods presented to exclude results for our Intuit Websites business, which we classified as discontinued operations in the fourth quarter of fiscal 2012. See Note 4, “Discontinued Operations,” for more information.
Beginning in the first quarter of fiscal 2013, we moved the segment revenue and operating results for our Mint business from Personal Finance in our Other Businesses segment to our Financial Services segment. Since segment revenue and operating results for Mint were not significant for any period presented, we did not reclassify previously reported segment results to reflect this change. As a result of the reorganization of the reporting structure of Personal Finance and synergies achieved during the time it was managed as one business, we allocated a portion of the total goodwill associated with that reporting unit to Personal Finance and a portion to Mint, which was transferred to the Financial Services reporting unit. We based the allocation of the total goodwill on the fair value of the remaining Personal Finance reporting unit compared with the fair value of the Mint component at the time of the transfer. The subsequent financial performance of the Personal Finance reporting unit relative to the projections used for the allocation of goodwill will determine the realizability of that goodwill.

 
Three Months Ended
 
Six Months Ended
(In millions)
January 31,
2013
 
January 31,
2012
 
January 31,
2013
 
January 31,
2012
Net revenue:
 
 
 
 
 
 
 
Financial Management Solutions
$
208

 
$
179

 
$
388

 
$
328

Employee Management Solutions
144

 
128

 
279

 
249

Payment Solutions
117

 
99

 
231

 
193

Consumer Tax
216

 
295

 
252

 
336

Accounting Professionals
123

 
131

 
155

 
158

Financial Services
93

 
92

 
186

 
181

Other Businesses
67

 
75

 
124

 
129

Total net revenue
$
968

 
$
999

 
$
1,615

 
$
1,574

 
 
 
 
 
 
 
 
Operating income from continuing operations:
 
 
 
 
 
 
 
Financial Management Solutions
$
75

 
$
69

 
$
133

 
$
120

Employee Management Solutions
85

 
72

 
170

 
147

Payment Solutions
24

 
23

 
46

 
47

Consumer Tax
24

 
114

 
(3
)
 
86

Accounting Professionals
72

 
81

 
62

 
67

Financial Services
20

 
25

 
35

 
43

Other Businesses
10

 
12

 
16

 
9

Total segment operating income
310

 
396

 
459

 
519

Unallocated corporate items:
 
 
 
 
 
 
 
Share-based compensation expense
(47
)
 
(43
)
 
(96
)
 
(83
)
Other common expenses
(157
)
 
(145
)
 
(314
)
 
(288
)
Amortization of acquired technology
(6
)
 
(3
)
 
(11
)
 
(6
)
Amortization of other acquired intangible assets
(7
)
 
(10
)
 
(14
)
 
(31
)
Total unallocated corporate items
(217
)
 
(201
)
 
(435
)
 
(408
)
Total operating income from continuing operations
$
93

 
$
195

 
$
24

 
$
111



19


ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) includes the following sections:
Executive Overview that discusses at a high level our operating results and some of the trends that affect our business.
Significant changes since our most recent Annual Report on Form 10-K in the Critical Accounting Policies and Estimates that we believe are important to understanding the assumptions and judgments underlying our financial statements.
Results of Operations that includes a more detailed discussion of our revenue and expenses.
Liquidity and Capital Resources which discusses key aspects of our statements of cash flows, changes in our balance sheets, and our financial commitments.
You should note that this MD&A discussion contains forward-looking statements that involve risks and uncertainties. Please see Item 1A in Part II of this Quarterly Report on Form 10-Q for important information to consider when evaluating such statements.
You should read this MD&A in conjunction with the financial statements and related notes in Part I, Item 1 of this report and our Annual Report on Form 10-K for the fiscal year ended July 31, 2012. We acquired Demandforce, Inc. in May 2012 and we have included the results of operations for that business in our consolidated results of operations from the date of acquisition. We have also reclassified our financial statements for all periods presented to reflect our Intuit Websites business as discontinued operations. See “Results of Operations – Discontinued Operations” later in this Item 2 for more information. Unless otherwise noted, the following discussion pertains only to our continuing operations.

Executive Overview
This overview provides a high-level discussion of our business and growth strategy as well as the trends, opportunities, challenges, and risks that affect our performance and operating results. Understanding our growth strategy and the trends that affect our business provides context for the discussion of financial results and future opportunities which follows this overview. This summary is not intended to be exhaustive, nor is it a substitute for the detailed discussion and analysis provided elsewhere in this Quarterly Report on Form 10-Q.
About Intuit
Intuit is a leading provider of business and financial management solutions for small businesses, consumers, accounting professionals and financial institutions. We organize our portfolio of businesses into four principal categories – Small Business Group, Tax, Financial Services and Other Businesses. These categories include seven financial reporting segments.
Small Business Group: This category includes three segments – Financial Management Solutions, Employee Management Solutions, and Payment Solutions – targeting the small business market and represented 39% of our revenue in fiscal 2012.
Our Financial Management Solutions segment includes QuickBooks financial and business management software and services; QuickBooks technical support; financial supplies; and Demandforce, which provides online marketing and customer communication solutions.
Our Employee Management Solutions segment provides payroll products and services.
Our Payment Solutions segment provides merchant services, including credit and debit card processing, electronic check conversion and automated clearing house services; Web-based transaction processing services for online merchants; and GoPayment mobile payment processing services.
Tax: This category includes two segments – Consumer Tax and Accounting Professionals – and represented 45% of our revenue in fiscal 2012.
Our Consumer Tax segment includes TurboTax income tax preparation products and services for consumers and small businesses.
Our Accounting Professionals segment includes Lacerte, ProSeries and Intuit Tax Online professional tax products and services. This segment also includes QuickBooks Premier Accountant Edition and the QuickBooks ProAdvisor Program for accounting professionals.


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Financial Services: This segment consists primarily of digital banking solutions - both online and mobile - for financial institutions and Mint online personal finance services. This segment represented 9% of our revenue in fiscal 2012.
Other Businesses: This segment represented 7% of our revenue in fiscal 2012 and includes our global businesses, primarily in Canada, the United Kingdom, and Singapore; Quicken personal finance products and services; and Intuit Health online patient-to-provider communication solutions.
Our Growth Strategy
We see significant opportunities to drive future growth, based on our assessment of key technology and demographic trends and our focus on building – and enabling others to build – innovative offerings to simplify the business of life for our customers. In the first quarter of fiscal 2013 we refined our three-point growth strategy:

Focus on the product – we call it “Delivering awesome product experiences.” Customers increasingly demand anytime, anywhere, any device access to their information. Therefore, we are increasingly focused on reimagining our products with a mobile-first, and in some cases mobile-only, design. Our TurboTax solutions, for example, let customers prepare and file their entire tax returns online, via tablet, mobile phone or the desktop. In addition, we believe that a key factor in growing our customer base is to deliver an amazing first-use experience, so our customers can get the value they expect as easily and quickly as possible.

Creating network effect platforms – we call it “Enabling the contributions of others.” We expect to solve problems faster and more efficiently for our growing base of customers by moving to more open platforms with application programming interfaces that enable the contributions of end users and third-party developers. One example of this is QuickBooks Online, which now allows small business customers all over the world to contribute to localizing the product.

Leveraging our data for our customers' benefit – we call it “Enabling data to create delight.” Our 60 million customers are generating valuable data that we seek to appropriately use to deliver better products and breakthrough benefits by eliminating the need to enter data, helping them make better decisions and improving transactions and interactions.
Industry Trends and Seasonality
The industry in which we operate is dynamic and highly competitive, and we expect it to remain so in the future. The markets for software and related services, especially highly-available connected services, are characterized by rapid technological change, shifting customer needs, and frequent new product introductions and enhancements. Competition and expertise in many of the markets we serve, particularly small business services, consumer tax, and online and mobile banking, have grown over the past few years and we expect this trend to continue. There are also large, cloud-based service companies who innovate quickly and serve small businesses and consumers. While today our competition with such companies may be limited, as we and those companies grow, our competition with them may increase. In recent years the widespread availability of the Internet, the emergence of mobile devices, and the explosion of social media have accelerated the pace of change and revolutionized the way that people throughout the world manage important financial tasks. The result is a global market that is shifting from traditional services that are paper-based, human-produced, and brick-and-mortar bound, to one where people understand, demand, and embrace the benefits of connected services. This trend toward connected services is the primary driver of the strategies in all of our businesses.
Our QuickBooks, Consumer Tax and Accounting Professionals businesses are highly seasonal. Revenue from our QuickBooks software products tends to be highest during our second and third fiscal quarters. Sales of income tax preparation products and services are heavily concentrated from November through April. In our Consumer Tax business, a greater proportion of our revenue has shifted to later in this seasonal period due in part to the growth in sales of TurboTax Online, for which we recognize revenue when tax returns are printed or electronically filed. The seasonality of our Consumer Tax and Accounting Professionals revenue is also affected by the timing of the availability of tax forms from taxing agencies and the ability of those agencies to receive electronic tax return submissions. Delays in the availability of tax forms or the ability of taxing agencies to receive submissions can cause revenue to shift between our fiscal quarters. These seasonal patterns mean that our total net revenue is usually highest during our second quarter ending January 31 and third quarter ending April 30. We typically report losses in our first quarter ending October 31 and fourth quarter ending July 31. During these quarters, revenue from our tax businesses is minimal while core operating expenses such as research and development continue at relatively consistent levels. We believe the seasonality of our revenue and profitability is likely to continue in the future. In our MD&A we often focus on year-to-date results for our seasonal businesses as they are generally more meaningful than quarterly results.

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Federal tax legislation occurred on January 2, 2013 and the Internal Revenue Service announced that it would accept no 2012 federal income tax returns before January 30, 2013, about two weeks later than the previous tax season and just two days before the end of our second fiscal quarter. As a result, we believe that some consumers delayed purchasing tax software and filing their federal tax returns, and we estimate this will shift approximately $140 million in revenue for our Consumer Tax offerings from the second quarter of fiscal 2013 to the third quarter of fiscal 2013. See “Results of Operations - Business Segment Results” later in this Item 2 for more information.
Key Challenges and Risks
Our growth strategy depends upon our ability to initiate and embrace disruptive technology trends, to enter new markets, and to drive broad adoption of the products and services we develop and market. Our future growth also increasingly depends on the strength of our third-party business relationships and our ability to continue to develop, maintain and strengthen new and existing relationships. To remain competitive and continue to grow, we are investing significant resources in our product development, marketing, and sales capabilities, and we expect to continue to do so in the future.
As we continue transitioning to offer more connected services, the ongoing operation and availability of our information technology and communication systems and those of our external service providers is becoming increasingly important. Because we help customers manage their financial lives, we face risks associated with the hosting, collection, use and retention of personal customer information and data. We are investing significant management attention and resources in our information technology infrastructure and in our privacy and security capabilities, and we expect to continue to do so in the future.
For a complete discussion of the most significant risks and uncertainties affecting our business, please see “Forward-Looking Statements and Risk Factors” in Item 1A of this Report.
Overview of Financial Results
The most important financial indicators that we use to assess our business are revenue growth and operating income growth for the company as a whole and for each business segment; operating income margin; earnings per share; and cash flow from operations. We also track certain non-financial drivers of revenue growth and, when material, identify them in the applicable discussions of business segment results below. These non-financial indicators include, for example, customer growth and retention, and, in certain businesses, transaction volume. Customers for our connected services offerings have generally grown faster than those for our traditional software offerings, reflecting our strategic focus on connected services over the past few years. Connected services generated $2.7 billion or 64% of our total revenue in fiscal 2012, compared with 50% of our total revenue five years ago. We expect connected services revenue as a percentage of our total revenue to continue to grow in the future. We track transaction volume in businesses such as our Payments Solutions business, where total credit and debit card transaction volume, which correlates strongly with the macroeconomic environment, contributes to revenue growth.
Total net revenue for the first six months of fiscal 2013 was $1.6 billion, an increase of 3% compared with the same period of fiscal 2012. Our Small Business Group was the key driver of revenue growth in the first six months of fiscal 2013. Revenue in our Small Business Group grew 17% compared with the same period a year ago due to growth in connected services offerings and our May 2012 acquisition of Demandforce. Revenue in our Consumer Tax segment was down 25% in the first six months of fiscal 2013. As discussed in “Industry Trends and Seasonality” above, we believe that the delay in the Internal Revenue Service's acceptance of 2012 federal income tax returns will shift some Consumer Tax revenue from the second quarter of fiscal 2013 to the third quarter of fiscal 2013.
Operating income from continuing operations for the first six months of fiscal 2013 was $24 million, a decrease of 78% compared with the same period of fiscal 2012. Higher revenue was more than offset by higher costs and expenses, including higher spending for staffing and for advertising and other marketing programs. Net income from continuing operations decreased 68% in the first six months of fiscal 2013 compared with the same period of fiscal 2012 due to the lower operating income partially offset by a discrete tax benefit that we recorded in the fiscal 2013 period. Diluted net income per share from continuing operations for the first six months of fiscal 2013 decreased 67% to $0.07, in line with the decrease in net income.
We ended the first six months of fiscal 2013 with cash, cash equivalents and investments totaling $678 million. During the first six months of fiscal 2013 we generated cash from operations, from the issuance of common stock under employee stock plans, and from the sale of our Intuit Websites business. During the same period we used cash for the repurchase of shares of our common stock under our stock repurchase programs, for the payment of cash dividends, and for capital expenditures. At January 31, 2013, we had authorization from our Board of Directors to expend up to an additional $1.5 billion for stock repurchases through August 15, 2014.



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Critical Accounting Policies and Estimates
In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our net revenue, operating income or loss, and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2012 have the greatest potential impact on our financial statements, so we consider them to be our critical accounting policies and estimates. We believe that there were no significant changes in those critical accounting policies and estimates during the first six months of fiscal 2013. Senior management has reviewed the development and selection of our critical accounting policies and estimates and their disclosure in this Quarterly Report on Form 10-Q with the Audit and Risk Committee of our Board of Directors.


Results of Operations
Financial Overview
(Dollars in millions, except per share amounts)
Q2
FY13
 
Q2
FY12
 
$
Change
 
%
Change
 
YTD
Q2
FY13
 
YTD
Q2
FY12
 
$
Change
 
%
Change
Total net revenue
$
968

 
$
999

 
$
(31
)
 
(3
)%
 
$
1,615

 
$
1,574

 
$
41

 
3
 %
Operating income from continuing operations
93

 
195

 
(102
)
 
(52
)%
 
24

 
111

 
(87
)
 
(78
)%
Net income from continuing operations
71

 
121

 
(50
)
 
(41
)%
 
20

 
63

 
(43
)
 
(68
)%
Diluted net income per share from continuing operations
$
0.23

 
$
0.40

 
$
(0.17
)
 
(43
)%
 
$
0.07

 
$
0.21

 
$
(0.14
)
 
(67
)%


Current Fiscal Quarter
Total net revenue decreased $31 million or 3% in the second quarter of fiscal 2013 compared with the same quarter of fiscal 2012. Revenue was up 16% in our Small Business Group. Financial Management Solutions segment revenue increased 17%, or 6% excluding revenue from Demandforce, which we acquired in May 2012. Higher organic revenue in this segment was driven by continuing growth in QuickBooks Online revenue. Employee Management Solutions segment revenue increased 13% due to favorable offering mix, improved customer adoption of payroll direct deposit services, and price increases for desktop payroll customers. Payment Solutions segment revenue increased 18% due to fee structure changes and higher total card transaction volume. In our tax businesses, Consumer Tax segment revenue was down 27% and Accounting Professionals segment revenue declined 7%. We believe that some Consumer Tax revenue will shift from the second quarter of fiscal 2013 to the third quarter of fiscal 2013 as discussed in “Executive Overview - Industry Trends and Seasonality” above. See “Business Segment Results” later in this Item 2 for more information about the results for all of our business segments.
Operating income from continuing operations decreased 52% in the second quarter of fiscal 2013 compared with the same quarter of fiscal 2012 due to the decrease in revenue described above and higher costs and operating expenses. Total operating expenses increased $68 million in the fiscal 2013 quarter due to higher expenses for staffing and for advertising and other marketing programs in our Financial Management Solutions and Consumer Tax segments. See “Operating Expenses” later in this Item 2 for more information.
Net income from continuing operations decreased 41% in the second quarter of fiscal 2013 compared with the same quarter of fiscal 2012. Interest expense was lower in the second quarter of fiscal 2013 due to the repayment of debt in fiscal 2012. Our effective tax rate for the second quarter of fiscal 2013 was 18% and our effective tax rate for the second quarter of fiscal 2012 was 34%. See “Non-Operating Income and Expenses – Interest Expense,” “Interest and Other Income, Net,” and “Income Taxes” later in this Item 2 for more information. Diluted net income per share from continuing operations for the second quarter of fiscal 2013 decreased 43% to $0.23, in line with the decrease in net income for that quarter.

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Fiscal Year to Date
Total net revenue increased $41 million or 3% in the first six months of fiscal 2013 compared with the same period of fiscal 2012. Revenue was up 17% in our Small Business Group, which was the main driver of revenue growth in the fiscal 2013 period. Financial Management Solutions segment revenue increased 18%, or 7% excluding revenue from Demandforce, which we acquired in May 2012. Higher organic revenue in this segment was driven by continuing growth in QuickBooks Online revenue. Employee Management Solutions segment revenue increased 12% due to favorable offering mix, improved customer adoption of payroll direct deposit services, and price increases for desktop payroll customers. Payment Solutions segment revenue increased 19% due to fee structure changes and higher total card transaction volume. In our tax businesses, Consumer Tax segment revenue decreased 25% and Accounting Professionals segment revenue declined