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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 October 31, 2019
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 0-21180
intuit2016rgb080317a18.jpg
INTUIT INC.
(Exact name of registrant as specified in its charter)
Delaware
 
77-0034661
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

2700 Coast Avenue, Mountain View, CA 94043
(Address of principal executive offices, including zip code)

(650944-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
 
Common Stock, $0.01 par value
 
INTU
 
Nasdaq Global Select Market
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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 260,300,339 shares of Common Stock, $0.01 par value, were outstanding at November 15, 2019.
 



INTUIT INC.
FORM 10-Q
INDEX
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-31.01
 EX-31.02
 EX-32.01
 EX-32.02
 EX-101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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, Mint, Lacerte, ProSeries, and Intuit ProConnect, 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.

 
 
 
 
 
 Intuit Q1 Fiscal 2020 Form 10-Q
2         
 


Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Please also see the section entitled "Risk Factors" in Item 1A of Part II of this Report for important information to consider when evaluating these statements. All statements in this report, other than statements that are purely historical, are forward-looking statements. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “forecast,” “estimate,” “seek,” and similar expressions also identify forward-looking statements. In this report, forward-looking statements include, without limitation, the following:
our expectations and beliefs regarding future conduct and growth of the business;
our beliefs and expectations regarding seasonality, competition and other trends that affect our business;
our expectation that we will continue to invest significant resources in our product development, marketing and sales capabilities;
our expectation that we will continue to invest significant management attention and resources in our information technology infrastructure and in our privacy and security capabilities;
our expectation that we will work with the broader industry and government to protect our customers from fraud;
our expectation that we will generate significant cash from operations;
our expectation that total service and other revenue as a percentage of our total revenue will continue to grow;
our expectations regarding the development of future products, services, business models and technology platforms and our research and development efforts;
our assumptions underlying our critical accounting policies and estimates, including our judgments and estimates regarding revenue recognition; stock volatility and other assumptions used to estimate the fair value of share-based compensation; the fair value of goodwill; and expected future amortization of acquired intangible assets;
our intention not to sell our investments and our belief that it is more likely than not that we will not be required to sell them before recovery at par;
our belief that the investments we hold are not other-than-temporarily impaired;
our belief that we take prudent measures to mitigate investment related risks;
our belief that our exposure to currency exchange fluctuation risk will not be significant in the future;
our assessments and estimates that determine our effective tax rate;
our belief that it is not reasonably possible that there will be a significant increase or decrease in our unrecognized tax benefits over the next 12 months;
our belief that our cash and cash equivalents, investments and cash generated from operations will be sufficient to meet our seasonal working capital needs, capital expenditure requirements, contractual obligations, debt service requirements and other liquidity requirements associated with our operations for at least the next 12 months;
our expectation that we will return excess cash generated by operations to our stockholders through repurchases of our common stock and the payment of cash dividends, after taking into account our operating and strategic cash needs;
our judgments and assumptions relating to our loan portfolio;
our belief that the credit facilities will be available to us should we choose to borrow under them; and
our assessments and beliefs regarding the future outcome of pending legal proceedings and inquiries by regulatory authorities, the liability, if any, that Intuit may incur as a result of those proceedings and inquiries, and the impact of any potential losses associated with such proceedings or inquiries on our financial statements.
We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. We encourage you to read carefully all information provided in this Quarterly Report and in our other filings with the Securities and Exchange Commission before deciding to invest in our stock or to maintain or change your investment. These forward-looking statements are based on information as of the filing date of this Quarterly Report, and we undertake no obligation to revise or update any forward-looking statement for any reason.

 
 
 
 
 
 Intuit Q1 Fiscal 2020 Form 10-Q
3         
 

Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
 
 
 
Three Months Ended
(In millions, except per share amounts)
October 31,
2019
 
October 31,
2018
Net revenue:
 
 
 
Product
$
353

 
$
347

Service and other
812

 
669

Total net revenue
1,165

 
1,016

Costs and expenses:
 
 
 
Cost of revenue:
 
 
 
Cost of product revenue
17

 
15

Cost of service and other revenue
267

 
227

Amortization of acquired technology
6

 
5

Selling and marketing
383

 
346

Research and development
334

 
294

General and administrative
146

 
137

Amortization of other acquired intangible assets
2

 
2

Total costs and expenses
1,155

 
1,026

Operating income (loss)
10

 
(10
)
Interest expense
(2
)
 
(4
)
Interest and other income, net
14

 

Income (loss) before income taxes
22

 
(14
)
Income tax benefit
(35
)
 
(48
)
Net income
$
57

 
$
34

 
 
 


Basic net income per share
$
0.22

 
$
0.13

Shares used in basic per share calculations
261

 
260

 
 
 
 
Diluted net income per share
$
0.22

 
$
0.13

Shares used in diluted per share calculations
264

 
264

 
 
 
 
Cash dividends declared per common share
$
0.53

 
$
0.47

See accompanying notes.

 
 
 
 
 
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Table of Contents

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
 
 
 
Three Months Ended
(In millions)
October 31,
2019
 
October 31,
2018
 
 
 
 
Net income
$
57

 
$
34

Other comprehensive income (loss), net of income taxes:
 
 
 
Unrealized gain on available-for-sale debt securities
1

 

Foreign currency translation loss

 
(4
)
Total other comprehensive income (loss), net
1

 
(4
)
Comprehensive income
$
58

 
$
30



See accompanying notes.


 
 
 
 
 
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Table of Contents

INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
 
 
 
(In millions)
October 31,
2019
 
July 31,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,630

 
$
2,116

Investments
625

 
624

Accounts receivable, net
104

 
87

Income taxes receivable
86

 
65

Prepaid expenses and other current assets
304

 
266

Current assets before funds held for customers
2,749

 
3,158

Funds held for customers
413

 
436

Total current assets
3,162

 
3,594

Long-term investments
13

 
13

Property and equipment, net
773

 
780

Operating lease right-of-use assets
307

 

Goodwill
1,655

 
1,655

Acquired intangible assets, net
49

 
54

Other assets
224

 
187

Total assets
$
6,183

 
$
6,283

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
50

 
$
50

Accounts payable
272

 
274

Accrued compensation and related liabilities
201

 
385

Deferred revenue
554

 
619

Other current liabilities
267

 
202

Current liabilities before customer fund deposits
1,344

 
1,530

Customer fund deposits
413

 
436

Total current liabilities
1,757

 
1,966

Long-term debt
373

 
386

Long-term deferred income tax liabilities
68

 
37

Operating lease liabilities
297

 

Other long-term obligations
55

 
145

Total liabilities
2,550

 
2,534

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock and additional paid-in capital
5,881

 
5,775

Treasury stock, at cost
(11,750
)
 
(11,611
)
Accumulated other comprehensive loss
(35
)
 
(36
)
Retained earnings
9,537

 
9,621

Total stockholders’ equity
3,633

 
3,749

Total liabilities and stockholders’ equity
$
6,183

 
$
6,283

See accompanying notes

 
 
 
 
 
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Table of Contents

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
 
Three Months Ended October 31, 2019
(In millions, except shares in thousands)
Shares of
Common
Stock
 
Common
Stock and
Additional
Paid-In Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2019
260,180

 
$
5,775

 
$
(11,611
)
 
$
(36
)
 
$
9,621

 
$
3,749

Comprehensive income

 

 

 
1

 
57

 
58

Issuance of stock under employee stock plans, net of shares withheld for employee taxes
690

 
(6
)
 
 
 

 

 
(6
)
Stock repurchases under stock repurchase programs
(515
)
 

 
(139
)
 

 

 
(139
)
Dividends and dividend rights declared ($0.53 per share)

 

 

 

 
(141
)
 
(141
)
Share-based compensation expense

 
112

 

 

 

 
112

Balance at October 31, 2019
260,355

 
$
5,881

 
$
(11,750
)
 
$
(35
)
 
$
9,537

 
$
3,633

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended October 31, 2018
(In millions, except shares in thousands)
Shares of
Common
Stock
 
Common
Stock and
Additional
Paid-In Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2018
258,616

 
$
5,338

 
$
(11,050
)
 
$
(36
)
 
$
8,564

 
$
2,816

Comprehensive income

 

 

 
(4
)
 
34

 
30

Issuance of stock under employee stock plans, net of shares withheld for employee taxes
1,422

 
57

 

 

 

 
57

Stock repurchases under stock repurchase programs
(467
)
 

 
(101
)
 

 

 
(101
)
Dividends and dividend rights declared ($0.47 per share)

 

 

 

 
(126
)
 
(126
)
Share-based compensation expense

 
106

 

 

 

 
106

Balance at October 31, 2018
259,571

 
$
5,501

 
$
(11,151
)
 
$
(40
)
 
$
8,472

 
$
2,782

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes.

 
 
 
 
 
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Table of Contents

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
 
 
 
 
 
Three Months Ended
(In millions)
October 31,
2019
 
October 31,
2018
Cash flows from operating activities:
 
 
 
Net income
$
57

 
$
34

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation
49

 
51

Amortization of acquired intangible assets
8

 
6

Non-cash operating lease cost
16

 

Share-based compensation expense
111

 
105

Deferred income taxes
(18
)
 
(9
)
Other
4

 
2

Total adjustments
170

 
155

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(16
)
 
21

Income taxes receivable
(22
)
 
(47
)
Prepaid expenses and other assets
(63
)
 
(72
)
Accounts payable
(5
)
 
24

Accrued compensation and related liabilities
(180
)
 
(191
)
Deferred revenue
(68
)
 
(69
)
Operating lease liabilities
(14
)
 

Other liabilities
14

 
2

Total changes in operating assets and liabilities
(354
)
 
(332
)
Net cash used in operating activities
(127
)
 
(143
)
Cash flows from investing activities:
 
 
 
Purchases of corporate and customer fund investments
(207
)
 
(70
)
Sales of corporate and customer fund investments
53

 
33

Maturities of corporate and customer fund investments
156

 
41

Purchases of property and equipment
(38
)
 
(35
)
Originations of term loans to small businesses
(81
)
 
(76
)
Principal repayments of term loans from small businesses
79

 
52

Other
(19
)
 
4

Net cash used in investing activities
(57
)
 
(51
)
Cash flows from financing activities:
 
 
 
Repayment of debt
(13
)
 
(13
)
Proceeds from issuance of stock under employee stock plans
63

 
120

Payments for employee taxes withheld upon vesting of restricted stock units
(71
)
 
(63
)
Cash paid for purchases of treasury stock
(140
)
 
(95
)
Dividends and dividend rights paid
(141
)
 
(129
)
Net change in customer fund deposits
(23
)
 
71

Other

 
(2
)
Net cash used in financing activities
(325
)
 
(111
)
Effect of exchange rates on cash, cash equivalents, restricted cash, and restricted cash equivalents

 
(4
)
Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents
(509
)
 
(309
)
Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period
2,352

 
1,631

Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period
$
1,843

 
$
1,322

 
 
 
 
Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents reported within the condensed consolidated balance sheets to the total amounts reported on the condensed consolidated statements of cash flows
 
 
 
Cash and cash equivalents
$
1,630

 
$
1,084

Restricted cash and restricted cash equivalents included in funds held for customers
213

 
238

Total cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period
$
1,843

 
$
1,322


See accompanying notes.

 
 
 
 
 
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Table of Contents

INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Intuit helps consumers, small businesses, and the self-employed prosper by delivering financial management and compliance products and services. We also provide specialized tax products to accounting professionals, who are key partners that help us serve small business customers.
Our flagship brands, QuickBooks, TurboTax and Mint, help customers run their small businesses, pay employees and send invoices, separate business and personal expenses, track their money, and file income taxes. ProSeries and Lacerte are our leading tax preparation offerings for professional accountants. 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.
Effective August 1, 2019, we adopted the requirements of Accounting Standards Update (ASU) 2016-02, "Leases (Topic 842)" (ASC 842) using the modified retrospective approach, under which financial results reported in prior periods were not restated. As a result, the condensed consolidated balance sheet as of October 31, 2019 is not comparable with that as of July 31, 2019.
Funds held for customers represent cash held on behalf of our customers that is invested in cash and cash equivalents and investment-grade available-for-sale debt securities. The purchases, sales and maturities of the investments for our funds held for customers are presented in investing activities in the condensed consolidated statements of cash flows. Customer fund deposits consist of amounts we owe on behalf of our customers. We present the net change in customer fund deposits in financing activities in the condensed consolidated statements of cash flows. For the three months ended October 31, 2018, we reclassified $71 million from investing activities to financing activities to conform to the current presentation, resulting in a decrease in net cash used in financing activities with a corresponding offset to net cash used in investing activities.
These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2019. Results for the three months ended October 31, 2019 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2020 or any other future period.
Seasonality
Our Consumer and Strategic Partner offerings have a significant and distinct seasonal pattern as sales and revenue from our income tax preparation products and services are heavily concentrated in the period from November through April. This seasonal pattern results in higher net revenues during our second and third quarters ending January 31 and April 30, respectively.
Significant Accounting Policies
We describe our significant accounting policies in Note 1 to the financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2019. See the discussion of changes to our lease accounting policy for the adoption of ASC 842, the new leases standard, below. There have been no other changes to our significant accounting policies during the first three months of fiscal 2019.
Leases
Our leases are primarily operating leases for office facilities. We do not have significant finance leases. We determine if an arrangement is a lease and classify it as either a finance or operating lease at lease inception. Operating leases are included in operating lease right-of-use (ROU) assets, other current liabilities, and operating lease liabilities on our condensed consolidated balance sheets.

 
 
 
 
 
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Table of Contents

Operating lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. Our leases generally do not have a readily determinable implicit rate, therefore we use our incremental borrowing rate at the commencement date in determining the present value of future payments. Our incremental borrowing rate is determined based on a yield curve derived from publicly traded bond offerings for companies with similar credit ratings to us. Our lease terms may include options to purchase, extend or terminate the lease when it is reasonably certain that we will exercise that option. We account for the lease and non-lease components as a single lease component.
We measure ROU assets based on the corresponding lease liabilities adjusted for any initial direct costs and prepaid lease payments made to the lessor before or at the commencement date, net of lease incentives. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are not included in the calculation of the ROU asset and lease liability and are recognized as lease expense is incurred. Our variable lease payments generally relate to amounts paid to lessors for common area maintenance under our real estate leases.
Our subleases generally do not relieve us of our primary obligations under the corresponding head lease. As a result, we account for the head lease based on the original assessment at inception. We determine if the sublease arrangement is either a sales-type, direct financing, or operating lease at inception. If the total remaining lease cost on the head lease for the term of the sublease is greater than the anticipated sublease income, the ROU asset is assessed for impairment. Our subleases are generally operating leases and we recognize sublease income on a straight-line basis over the sublease term.
Use of Estimates
In preparing our condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP), we make certain judgments, estimates, and assumptions that affect the amounts reported in our financial statements and the disclosures made in the accompanying notes. For example, we use judgments and estimates in determining how revenue should be recognized. These judgments and estimates include identifying performance obligations, determining if the performance obligations are distinct, determining the standalone sales price (SSP) and timing of revenue recognition for each distinct performance obligation, and estimating variable consideration to be included in the transaction price. We use estimates in determining the collectibility of accounts receivable and notes receivable, the appropriate levels of various accruals including accruals for litigation contingencies, the discount rate used to calculate lease liabilities, the amount of our worldwide tax provision, and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and fair values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
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 consist of the 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 and unrecognized compensation expense that are less than the average market price for our common stock, and RSUs with unrecognized compensation expense that is 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 and unrecognized compensation expense that are greater than the average market price for our common stock, and RSUs with unrecognized compensation expense that is 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 and the amount of compensation expense for future service that we have not yet recognized for stock options and RSUs are assumed to be used to repurchase shares.
All of the RSUs we grant have dividend rights. Dividend rights are accumulated and paid when the underlying RSUs vest. Since the dividend rights are subject to the same vesting requirements as the underlying equity awards they are considered a contingent transfer of value. Consequently, the RSUs are not considered participating securities and we do not present them separately in earnings per share.
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.

 
 
 
 
 
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Table of Contents

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
(In millions, except per share amounts)
October 31,
2019
 
October 31,
2018
Numerator:
 
 
 
Net income
$
57

 
$
34

 
 
 
 
Denominator:
 
 
 
Shares used in basic per share amounts:
 
 
 
Weighted average common shares outstanding
261

 
260

 
 
 
 
Shares used in diluted per share amounts:
 
 
 
Weighted average common shares outstanding
261

 
260

Dilutive common equivalent shares from stock options
 
 
 
and restricted stock awards
3

 
4

Dilutive weighted average common shares outstanding
264

 
264

 
 
 
 
Basic and diluted net income per share:
 
 
 
Basic net income per share
$
0.22

 
$
0.13

 
 
 
 
Diluted net income per share
$
0.22

 
$
0.13

 
 
 
 
Shares excluded from diluted net income per share:
 
 
 
Weighted average stock options and restricted stock units that have been excluded from dilutive common equivalent shares outstanding due to their anti-dilutive effect

 


Deferred Revenue
Generally, we receive payment at the time we enter into a contract with a customer. We record deferred revenue when we have entered into a contract with a customer and cash payments are received or due prior to transfer of control or satisfaction of the related performance obligation. During the three months ended October 31, 2019, we recognized revenue of $355 million that was included in deferred revenue at July 31, 2019. During the three months ended October 31, 2018, we recognized revenue of $327 million that was included in deferred revenue at July 31, 2018.
Our performance obligations are generally satisfied within 12 months of the initial contract date. As of October 31, 2019 and July 31, 2019, the deferred revenue balance related to performance obligations that will be satisfied after 12 months was $2 million and $4 million, respectively, and is included in other long-term obligations on our condensed consolidated balance sheets.
Notes Receivable and Allowances for Loan Losses
Notes receivable consist of term loans to small businesses and are included in prepaid expenses and other current assets on our condensed consolidated balance sheets. As of October 31, 2019 and July 31, 2019, the notes receivable balance was $96 million and $95 million, respectively, and the allowance for loan losses were not significant. The term loans are not secured and are recorded at amortized cost, net of allowances for loan losses. We maintain an allowance for loan losses to reserve for potentially uncollectible notes receivable. We evaluate the creditworthiness of our loan portfolio on a pooled basis due to its composition of small, homogeneous loans with similar general credit risk and characteristics and apply a loss rate at the time of loan origination. The loss rate and underlying model are updated periodically to reflect actual loan performance and changes in assumptions. We make judgments about the known and inherent risks in the loan portfolio, adverse situations that may affect borrowers’ ability to repay and current economic conditions. When we determine that amounts are uncollectible, we write them off against the allowance.
Concentration of Credit Risk and Significant Customers
No customer accounted for 10% or more of total net revenue in the three months ended October 31, 2019 or October 31, 2018. No customer accounted for 10% or more of gross accounts receivable at October 31, 2019 or July 31, 2019.

 
 
 
 
 
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Accounting Standards Recently Adopted

Leases - In February 2016 the FASB issued ASU 2016-02, “Leases (Topic 842)”. This standard amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. We adopted this standard in the first quarter of our fiscal year beginning August 1, 2019 using the modified retrospective approach, under which financial results reported in prior periods were not adjusted. We elected certain practical expedients, including the relief package practical expedient which among other things allowed us to carry forward the historical lease classifications. We also elected the practical expedient to combine lease and non-lease components for all asset classes.
The adoption of ASC 842 on August 1, 2019 resulted in the recognition of ROU assets and operating lease liabilities of $319 million and $361 million, respectively, related to our operating leases. Adoption of the standard also resulted in the elimination of deferred rent liabilities of $47 million and prepaid rent of $5 million. Adoption did not result in any cumulative-effect adjustments to retained earnings, and there was no material impact to our condensed consolidated statements of operations or our condensed consolidated statements of cash flows.
Accounting Standards Not Yet Adopted
Internal-Use Software - In August 2018 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, “Intangibles—Goodwill and Other (Topic 350): Internal-Use Software.” This standard aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2020. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2018-15 on our condensed consolidated financial statements.
Goodwill Impairment - In January 2017 the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2020. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2017-04 on our condensed consolidated financial statements.
Financial Instruments - In June 2016 the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” This standard requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2020. Earlier adoption is permitted in the first quarter of our fiscal year beginning August 1, 2019. We are currently evaluating the impact of our pending adoption of ASU 2016-13 on our condensed consolidated financial statements.
We do not expect that any other recently issued accounting pronouncements will have a significant effect on our financial statements.

 
 
 
 
 
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Table of Contents

2. Fair Value Measurements
Fair Value Hierarchy
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 unobservable 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 values 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.
 
October 31, 2019
 
July 31, 2019
(In millions)
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents, primarily time deposits, savings deposit accounts, and money market funds
$
1,145

 
$

 
$

 
$
1,145

 
$
1,647

 
$

 
$

 
$
1,647

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds

 
3

 

 
3

 

 
5

 

 
5

Corporate notes

 
790

 

 
790

 

 
800

 

 
800

U.S. agency securities

 
32

 

 
32

 

 
19

 

 
19

Total available-for-sale debt securities

 
825

 

 
825

 

 
824

 

 
824

Total assets measured at fair value on a recurring basis
$
1,145

 
$
825

 
$

 
$
1,970

 
$
1,647

 
$
824

 
$

 
$
2,471



 
 
 
 
 
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Table of Contents

The following table summarizes our cash equivalents and available-for-sale debt securities by balance sheet classification and level in the fair value hierarchy at the dates indicated.
 
October 31, 2019
 
July 31, 2019
(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
$
1,145

 
$

 
$

 
$
1,145

 
$
1,647

 
$

 
$

 
$
1,647

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In investments
$

 
$
625

 
$

 
$
625

 
$

 
$
624

 
$

 
$
624

In funds held for customers

 
200

 

 
200

 

 
200

 

 
200

Total available-for-sale debt securities
$

 
$
825

 
$

 
$
825

 
$

 
$
824

 
$

 
$
824


We value our Level 1 assets, consisting primarily of time deposits, savings deposit accounts, and 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.
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended October 31, 2019.
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. In all periods presented, cash equivalents consist primarily of time deposits, savings deposit accounts, and money market funds. Investments consist primarily of investment-grade available-for-sale debt securities. Funds held for customers represent cash held on behalf of our customers that is invested in cash and cash equivalents and investment-grade available-for-sale securities, restricted for use solely for the purpose of satisfying amounts we owe on behalf of our customers. 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.
 
October 31, 2019
 
July 31, 2019
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Classification on condensed consolidated balance sheets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,630

 
$
1,630

 
$
2,116

 
$
2,116

Investments
622

 
625

 
622

 
624

Funds held for customers
412

 
413

 
436

 
436

Long-term investments
13

 
13

 
13

 
13

Total cash and cash equivalents, investments, and funds
held for customers
$
2,677

 
$
2,681

 
$
3,187

 
$
3,189



 
 
 
 
 
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The following table summarizes our cash and cash equivalents, investments, and funds held for customers by investment category at the dates indicated.
 
October 31, 2019
 
July 31, 2019
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Type of issue:
 
 
 
 
 
 
 
Total cash, cash equivalents, restricted cash,
and restricted cash equivalents
$
1,843

 
$
1,843

 
$
2,352

 
$
2,352

Available-for-sale debt securities:
 
 
 
 
 
 
 
Municipal bonds
3

 
3

 
5

 
5

Corporate notes
786

 
790

 
798

 
800

U.S. agency securities
32

 
32

 
19

 
19

Total available-for-sale debt securities
821

 
825

 
822

 
824

Other long-term investments
13

 
13

 
13

 
13

Total cash, cash equivalents, restricted cash, restricted cash equivalents, and investments
$
2,677

 
$
2,681

 
$
3,187

 
$
3,189


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 on our condensed consolidated statements of operations. Gross realized gains and losses on our available-for-sale debt securities for the three months ended October 31, 2019 and October 31, 2018 were not significant.
We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in accumulated other comprehensive income or loss in the stockholders’ equity section of our condensed consolidated balance sheets. Gross unrealized gains and losses on our available-for-sale debt securities at October 31, 2019 and July 31, 2019 were not significant.
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 October 31, 2019 were not other-than-temporarily impaired. Unrealized losses on available-for-sale debt securities at October 31, 2019 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. In addition, it is more likely than not that we will not be required to sell them before recovery at par, which may be at maturity.
The following table summarizes our available-for-sale debt securities, included in investments and funds held for customers, classified by the stated maturity date of the security at the dates indicated.
 
October 31, 2019
 
July 31, 2019
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due within one year
$
382

 
$
383

 
$
415

 
$
416

Due within two years
219

 
221

 
208

 
208

Due within three years
190

 
191

 
163

 
164

Due after three years
30

 
30

 
36

 
36

Total available-for-sale debt securities
$
821

 
$
825

 
$
822

 
$
824


The following table summarizes our funds held for customers by investment category at the dates indicated.
 
October 31, 2019
 
July 31, 2019
(In millions)
 
 
 
Restricted cash and restricted cash equivalents
$
213

 
$
236

Restricted available-for-sale debt securities
200

 
200

Total funds held for customers
$
413

 
$
436

 
October 31, 2018
 
July 31, 2018
(In millions)
 
 
 
Restricted cash and restricted cash equivalents
$
238

 
$
167

Restricted available-for-sale debt securities
200

 
200

Total funds held for customers
$
438

 
$
367



 
 
 
 
 
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4. Current Liabilities
Short-Term Debt
On May 2, 2019 we entered into an amended and restated credit agreement with certain institutional lenders with an aggregate principal amount of $1.4 billion, including a $400 million unsecured term loan that matures on February 1, 2021 and a $1 billion unsecured revolving credit facility that matures on May 2, 2024. This agreement amended and restated our prior unsecured revolving credit facility dated February 1, 2016.
At October 31, 2019, $375 million was outstanding under the term loan, of which $50 million was classified as short-term debt. See Note 5, “Long-Term Obligations and Commitments – Long-Term Debt,” for more information regarding the term loan.
Unsecured Revolving Credit Facility
The amended and restated credit agreement we entered into on May 2, 2019 includes a $1 billion unsecured revolving credit facility that will expire on May 2, 2024. Under this agreement we may, subject to certain customary conditions, on one or more occasions increase commitments under the unsecured revolving credit facility in an amount not to exceed $250 million in the aggregate and may extend the maturity date up to two times. Advances under the unsecured revolving credit facility accrue interest at rates that are equal to, at our election, either Bank of America's alternate base rate plus a margin that ranges from 0.0% to 0.1% or the London Interbank Offered Rate (LIBOR) plus a margin that ranges from 0.69% to 1.1%. Actual margins under either election will be based on our senior debt credit ratings. The amended and restated credit agreement includes customary affirmative and negative covenants, including financial covenants that require us to maintain a 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 annual interest expense of not less than 3.00 to 1.00 as of the last day of each fiscal quarter. As of October 31, 2019 we were compliant with all required covenants. At October 31, 2019 no amounts were outstanding under this unsecured revolving credit facility. We paid no interest on the unsecured revolving credit facility during both the three months ended October 31, 2019 and 2018.
Other Current Liabilities
Other current liabilities were as follows at the dates indicated:
(In millions)
October 31,
2019
 
July 31,
2019
Executive deferred compensation plan liabilities
$
122

 
$
108

Current portion of operating lease liabilities
55

 

Reserve for promotional discounts and rebates
12

 
11

Reserve for returns and credits
26

 
24

Current portion of deferred rent

 
6

Current portion of dividend payable
8

 
7

Other
44

 
46

Total other current liabilities
$
267

 
$
202


The balances of several of our other current liabilities, particularly our reserves for product returns and promotional discounts 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.
5. Long-Term Obligations and Commitments
Long-Term Debt
On May 2, 2019 we entered into an amended and restated credit agreement with certain institutional lenders for a credit facility with an aggregate principal amount of $1.4 billion, which includes a $400 million unsecured term loan. This agreement amended and restated our prior unsecured revolving credit facility dated February 1, 2016. Under this agreement we may, subject to certain customary conditions, on one or more occasions increase commitments under the term loan in an amount not to exceed $400 million in the aggregate. The term loan accrues interest at rates that are equal to, at our election, either Bank of America's alternate base rate plus a margin that ranges from 0.0% to 0.125% or LIBOR plus a margin that ranges from 0.625% to 1.125%. Actual margins under either election will be based on our senior debt credit ratings. The amended and

 
 
 
 
 
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restated credit agreement includes customary affirmative and negative covenants. See Note 4, “Current Liabilities – Unsecured Revolving Credit Facility,” for more information. The term loan is subject to quarterly principal payments of $12.5 million, with the balance payable on February 1, 2021. At October 31, 2019, $375 million was outstanding under the term loan, of which $50 million was classified as short-term debt. The carrying value of the term loan approximates its fair value. Interest on the term loan is payable monthly. We paid $3 million for interest on the term loan during the three months ended October 31, 2019 and $4 million during the three months ended October 31, 2018.
Secured Revolving Credit Facility
On February 19, 2019, a subsidiary of Intuit entered into a $300 million secured revolving credit facility with a lender. The revolving credit facility is secured by cash and receivables of the subsidiary and is non-recourse to Intuit Inc. Advances under this secured revolving credit facility are used to fund a portion of our loans to qualified small businesses. The secured revolving credit facility is available for use for a term of two years and accrues interest at LIBOR plus 2.39%. Unused portions of the credit facility accrue interest at a rate of 0.50%. Outstanding advances mature on August 19, 2021 and payments made prior to February 19, 2020 are subject to a 1% prepayment fee. The agreement includes certain affirmative and negative covenants, including financial covenants that require the subsidiary to maintain specified financial ratios. As of October 31, 2019 we were compliant with all required covenants. At October 31, 2019, $48 million was outstanding under this facility, with a weighted-average interest rate of 7.39%, which includes the unused facility fee. The outstanding balance is secured by cash and receivables of the subsidiary totaling $105 million. Interest on the facility is payable monthly. We paid $1 million for interest on the secured revolving credit facility during the three months ended October 31, 2019.
Other Long-Term Obligations
Other long-term obligations were as follows at the dates indicated:
(In millions)
October 31,
2019
 
July 31,
2019
Long-term income tax liabilities
$
41

 
$
89

Total deferred rent

 
47

Total dividend payable
12

 
11

Other
11

 
12

Total long-term obligations
64

 
159

Less current portion (included in other current liabilities)
(9
)
 
(14
)
Long-term obligations due after one year
$
55

 
$
145


Unconditional Purchase Obligations
We describe our purchase obligations in Note 8 to the financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2019. There were no significant changes in our purchase obligations during the three months ended October 31, 2019.
6. Leases
We lease office facilities under non-cancellable operating lease arrangements. Our facility leases generally provide for periodic rent increases and may contain escalation clauses and renewal options. Our leases have remaining lease terms of less than 1 year to 11 years, some of which include one or more options to extend the leases for up to 10 years per option, generally at rates to be determined in accordance with the agreements. Options to extend the lease are included in the lease liability if they are reasonably certain of being exercised. We do not have significant finance leases.
We sublease certain office facilities to third parties. These subleases have remaining lease terms from 1 to 5 years, and some include options to extend the leases for up to