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.


20


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.

21


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.



22


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.

23


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 2%. 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 78% in the first six months of fiscal 2013 compared with the same period of fiscal 2012. The increase in revenue described above was more than offset by higher costs and operating expenses. Total operating expenses increased $110 million in the fiscal 2013 period 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 68% in the first six months of fiscal 2013 compared with the same period of fiscal 2012. Interest expense was lower in the fiscal 2013 period due to the repayment of debt in fiscal 2012. We recorded a $10 million gain on the sale of a stock warrant in interest and other income in the first quarter of fiscal 2012. We recorded an $8 million income tax benefit on pretax income of $12 million for the first six months of fiscal 2013 due to the retroactive reinstatement of the research and experimentation tax credit. Our effective tax rate for the first six months of fiscal 2012 was 33%. 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 first six months of fiscal 2013 decreased 67% to $0.07, in line with the decrease in net income for that period.
Business Segment Results
The information below is organized in accordance with our seven reportable business segments. 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.
Segment operating income or loss is segment net revenue less segment cost of revenue and operating expenses. See “Executive Overview – Industry Trends and Seasonality” earlier in this Item 2 for a description of the seasonality of our business. Segment expenses do not include certain costs, such as corporate selling and marketing, product development, and general and administrative expenses and share-based compensation expenses, which are not allocated to specific segments. These unallocated costs totaled $410 million in the first six months of fiscal 2013 and $371 million in the first six months of fiscal 2012. Unallocated costs increased in the fiscal 2013 period due to increases in corporate product development and selling and marketing expenses in support of the growth of our businesses, and to a lesser extent to increases in share-based compensation expenses. Segment expenses also do not include amortization of acquired technology, amortization of other acquired intangible assets, and goodwill and intangible asset impairment charges. See Note 10 to the financial statements in Part I, Item 1 of this report for reconciliations of total segment operating income or loss to consolidated operating income or loss for each fiscal period presented.
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.
We calculate revenue growth rates and segment operating margin figures using dollars in thousands. Those results may vary from figures calculated using the dollars in millions presented below.

24


Financial Management Solutions
(Dollars in millions)
Q2
FY13
 
Q2
FY12
 
%
Change
 
YTD
Q2
FY13
 
YTD
Q2
FY12
 
%
Change
Product revenue
$
112

 
$
116

 
 
 
$
201

 
$
205

 
 
Service and other revenue
96

 
63

 
 
 
187

 
123

 
 
Total segment revenue
$
208

 
$
179

 
17
%
 
$
388

 
$
328

 
18
%
% of total revenue
22
%
 
18
%
 
 
 
24
%
 
21
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income
$
75

 
$
69

 
6
%
 
$
133

 
$
120

 
9
%
% of related revenue
36
%
 
39
%
 
 
 
34
%
 
37
%
 
 

Financial Management Solutions (FMS) product revenue is derived primarily from QuickBooks desktop software products and financial supplies such as paper checks, envelopes, invoices, business cards and business stationery. FMS service and other revenue is derived primarily from QuickBooks Online; QuickBooks technical support plans; Demandforce, which provides online marketing and customer communication solutions for small businesses; QuickBase; and royalties from small business online services.
FMS total net revenue increased $29 million or 17% in the second quarter of fiscal 2013 and $60 million or 18% in the first six months of fiscal 2013 compared with the same periods of fiscal 2012. When adjusted to exclude revenue from Demandforce, which we acquired in May 2012, FMS revenue was 6% higher in the second quarter of fiscal 2013 and 7% higher in the first six months of fiscal 2013. U.S. QuickBooks Online subscribers grew 24%, driving the organic revenue growth in this segment in both fiscal 2013 periods. U.S. QuickBooks desktop units were down 18% in the second quarter of fiscal 2013 compared with the second quarter of fiscal 2012, due in part to smaller discounts in the retail channel and a continuing trend toward customer adoption of our online QuickBooks offerings.
FMS segment operating income as a percentage of related revenue decreased in the second quarter and first six months of fiscal 2013 compared with the same periods of fiscal 2012. The increases in segment revenue described above were partially offset by higher segment costs and expenses that included costs and expenses for Demandforce. For the first six months of fiscal 2013 staffing expenses were about $39 million higher, driven by an increase in headcount, and advertising and other marketing program expenses also increased.
Employee Management Solutions

(Dollars in millions)
Q2
FY13
 
Q2
FY12
 
%
Change
 
YTD
Q2
FY13
 
YTD
Q2
FY12
 
%
Change
Product revenue
$
74

 
$
69

 
 
 
$
145

 
$
137

 
 
Service and other revenue
70

 
59

 
 
 
134

 
112

 
 
Total segment revenue
$
144

 
$
128

 
13
%
 
$
279

 
$
249

 
12
%
% of total revenue
15
%
 
13
%
 
 
 
17
%
 
16
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income
$
85

 
$
72

 
17
%
 
$
170

 
$
147

 
16
%
% of related revenue
59
%
 
57
%
 
 
 
61
%
 
59
%
 
 

Employee Management Solutions (EMS) product revenue is derived primarily from QuickBooks Basic Payroll and QuickBooks Enhanced Payroll, which are products sold on a subscription basis that offer payroll tax tables, payroll reports, federal and state payroll tax forms, and electronic tax payment and filing to small businesses that prepare their own payrolls. EMS service and other revenue is derived primarily from QuickBooks Online Payroll, QuickBooks Assisted Payroll, Intuit Online Payroll, Intuit Full Service Payroll, fees for payroll direct deposit services, and fees for other small business payroll and employee management services. Service and other revenue for this segment also includes interest earned on funds held for customers.
EMS total net revenue increased $16 million or 13% in the second quarter of fiscal 2013 and $30 million or 12% in the first six months of fiscal 2013 compared with the same periods of fiscal 2012. Revenue was higher in the fiscal 2013 periods due to customer growth in our Enhanced desktop payroll and online payroll solutions, improved customer adoption of payroll direct

25


deposit services, and price increases for desktop payroll customers. At January 31, 2013, total U.S. payroll customers were up 3% while U.S. online payroll customers were up 18% compared with January 31, 2012.
EMS segment operating income as a percentage of related revenue increased slightly in the second quarter and first six months of fiscal 2013 compared with the same periods of fiscal 2012. Segment operating income was consistent in these periods due to the increases in segment revenue described above and relatively stable segment operating expenses.
Payment Solutions

(Dollars in millions)
Q2
FY13
 
Q2
FY12
 
%
Change
 
YTD
Q2
FY13
 
YTD
Q2
FY12
 
%
Change
Product revenue
$
7

 
$
6

 
 
 
$
13

 
$
12

 
 
Service and other revenue
110

 
93

 
 
 
218

 
181

 
 
Total segment revenue
$
117

 
$
99

 
18
%
 
$
231

 
$
193

 
19
 %
% of total revenue
12
%
 
10
%
 
 
 
14
%
 
12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income
$
24

 
$
23

 
8
%
 
$
46

 
$
47

 
(1
)%
% of related revenue
21
%
 
23
%
 
 
 
20
%
 
24
%
 
 

Payment Solutions product revenue is derived primarily from QuickBooks Point of Sale solutions, which help retailers process and track sales electronically and integrate with QuickBooks financial software. Payment Solutions service and other revenue is derived primarily from merchant services for small businesses that include credit card, debit card, electronic benefits, and gift card processing services; check verification, check guarantee and electronic check conversion, including automated clearing house (ACH) and Check21 capabilities; Web-based transaction processing services for online merchants; and GoPayment mobile payment processing services.
Payment Solutions total net revenue increased $18 million or 18% in the second quarter of fiscal 2013 and $38 million or 19% in the first six months of fiscal 2013 compared with the same periods of fiscal 2012. Higher revenue in the fiscal 2013 periods was driven by fee structure changes and 9% higher U.S. total credit and debit card transaction volume. Our U.S. merchant customer base grew 12% in the first six months of fiscal 2013 compared with the same period of fiscal 2012.
Payment Solutions segment operating income as a percentage of related revenue decreased in the second quarter and first six months of fiscal 2013 compared with the same periods of fiscal 2012. The increases in segment revenue described above were offset by higher segment costs and expenses, including higher chargeback losses from mobile offerings in cost of revenue and higher staffing expenses associated with an increase in headcount.
Consumer Tax

(Dollars in millions)
Q2
FY13
 
Q2
FY12
 
%
Change
 
YTD
Q2
FY13
 
YTD
Q2
FY12
 
%
Change
Product revenue
$
54

 
$
63

 
 
 
$
61

 
$
74

 
 
Service and other revenue
162

 
232

 
 
 
191

 
262

 
 
Total segment revenue
$
216

 
$
295

 
(27
)%
 
$
252

 
$
336

 
(25
)%
% of total revenue
22
%
 
30
%
 
 
 
16
 %
 
21
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income (loss)
$
24

 
$
114

 
(79
)%
 
$
(3
)
 
$
86

 
(103
)%
% of related revenue
11
%
 
38
%
 
 
 
(1
)%
 
25
%
 
 

Consumer Tax product revenue is derived primarily from TurboTax federal and state consumer and small business desktop tax return preparation software. Consumer Tax service and other revenue is derived primarily from TurboTax Online tax return preparation services and electronic tax filing services. Due to the seasonal nature of our Consumer Tax business, we will not have substantially complete results for the 2012 tax season until the third quarter of fiscal 2013.

26


Consumer Tax segment revenue decreased $84 million or 25% in the first six months of fiscal 2013 compared with the same period of fiscal 2012. Federal tax legislation occurred on January 2, 2013 and the Internal Revenue Service announced that it would accept no federal income tax returns before January 30, 2013, about two weeks later than for 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 that approximately $140 million in revenue for our Consumer Tax offerings will shift from the second quarter of fiscal 2013 to the third quarter of fiscal 2013.
Consumer Tax segment operating income as a percentage of related revenue was significantly lower in the first six months of fiscal 2013 compared with the same period of fiscal 2012 due to the revenue shift described above and, to a lesser extent, to higher expenses for advertising and other marketing programs in the fiscal 2013 period.
Accounting Professionals

(Dollars in millions)
Q2
FY13
 
Q2
FY12
 
%
Change
 
YTD
Q2
FY13
 
YTD
Q2
FY12
 
%
Change
Product revenue
$
120

 
$
126

 
 
 
$
148

 
$
149

 
 
Service and other revenue
3

 
5

 
 
 
7

 
9

 
 
Total segment revenue
$
123

 
$
131

 
(7
)%
 
$
155

 
$
158

 
(2
)%
% of total revenue
13
%
 
13
%
 
 
 
10
%
 
10
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income
$
72

 
$
81

 
(11
)%
 
$
62

 
$
67

 
(8
)%
% of related revenue
59
%
 
61
%
 
 
 
40
%
 
42
%
 
 

Accounting Professionals product revenue is derived primarily from Lacerte and ProSeries professional tax preparation software products and from QuickBooks Premier Accountant Edition and ProAdvisor Program for professional accountants. Accounting Professionals service and other revenue is derived primarily from Intuit Tax Online tax return preparation services, electronic tax filing services, bank product transmission services and training services. Due to the seasonal nature of our Accounting Professionals business, we will not have substantially complete results for the 2012 tax season until the third quarter of fiscal 2013.
Accounting Professionals total net revenue decreased $3 million or 2% in the first six months of fiscal 2013 compared with the same period of fiscal 2012. The slight decline in revenue was due to our launch of a new professional tax offering that has different revenue timing compared with our existing offerings.
Accounting Professionals segment operating income as a percentage of related revenue was slightly lower in the first six months of fiscal 2013 compared with the same period of fiscal 2012 due to the decrease in revenue described above.
Financial Services

(Dollars in millions)
Q2
FY13
 
Q2
FY12
 
%
Change
 
YTD
Q2
FY13
 
YTD
Q2
FY12
 
%
Change
Product revenue
$

 
$

 
 
 
$

 
$

 
 
Service and other revenue
93

 
92

 
 
 
186

 
181

 
 
Total segment revenue
$
93

 
$
92

 
1
 %
 
$
186

 
$
181

 
3
 %
% of total revenue
9
%
 
9
%
 
 
 
11
%
 
12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income
$
20

 
$
25

 
(20
)%
 
$
35

 
$
43

 
(19
)%
% of related revenue
22
%
 
28
%
 
 
 
19
%
 
24
%
 
 

Financial Services service and other revenue is derived primarily from online and mobile banking solutions that are hosted in our data centers and delivered as software as a service to financial institutions. Financial Services service and other revenue also includes fees for implementation services and online lead generation fees from our Mint personal finance business.

27


Financial Services total net revenue increased 1% in the second quarter of fiscal 2013 and 3% in the first six months of fiscal 2013 compared with the same periods of fiscal 2012. Financial Services revenue increased 6% in the second quarter of fiscal 2013 and 8% in the first six months of fiscal 2013 when fiscal 2012 revenue is adjusted to exclude revenue from our corporate banking business, which we sold in March 2012, and fiscal 2013 revenue is adjusted to exclude Mint revenue, which we reported in our Other Businesses segment in fiscal 2012. Revenue growth in both fiscal 2013 periods was primarily driven by higher mobile banking revenue. Mobile banking revenue grew due to an increase in mobile banking end users and usage.
Financial Services segment operating income as a percentage of related revenue declined in the second quarter and first six months of fiscal 2013 compared with the same periods of fiscal 2012. The increases in segment revenue described above were more than offset by higher segment costs and expenses, including higher data center hosting expenses and slightly higher staffing expenses associated with a modest increase in headcount.
Other Businesses
(Dollars in millions)
Q2
FY13
 
Q2
FY12
 
%
Change
 
YTD
Q2
FY13
 
YTD
Q2
FY12
 
%
Change
Product revenue
$
35

 
$
39

 
 
 
$
61

 
$
64

 
 
Service and other revenue
32

 
36

 
 
 
63

 
65

 
 
Total segment revenue
$
67

 
$
75

 
(10
)%
 
$
124

 
$
129

 
(4
)%
% of total revenue
7
%
 
7
%
 
 
 
8
%
 
8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment operating income
$
10

 
$
12

 
(17
)%
 
$
16

 
$
9

 
72
 %
% of related revenue
15
%
 
16
%
 
 
 
13
%
 
7
%
 
 

Other Businesses consist primarily of Quicken; Intuit Health; and our global businesses, primarily in Canada, the United Kingdom, and Singapore. Quicken product revenue is derived primarily from Quicken personal finance desktop software products. Quicken service and other revenue is derived primarily from fees from consumer online transactions and Quicken Loans trademark royalties. Intuit Health service revenue is derived from online patient-to-provider communication services and fees for implementation services. In Canada, product revenue is derived primarily from localized versions of QuickBooks and Quicken as well as consumer desktop tax return preparation software and professional tax preparation products. Service and other revenue in Canada consists primarily of revenue from QuickBooks support plans, payroll services, and merchant payment processing services. In the United Kingdom, product revenue is derived primarily from localized versions of QuickBooks and QuickBooks Payroll. In Singapore and other international locations, service and other revenue is derived from QuickBooks Online.
Other Businesses total net revenue decreased 10% in the second quarter of fiscal 2013 and 4% in the first six months of fiscal 2013 compared with the same periods of fiscal 2012. Other Businesses revenue declined 3% in the second quarter of fiscal 2013 and increased 3% in the first six months of fiscal 2013 when fiscal 2012 revenue is adjusted to exclude Mint revenue, which we transferred to our Financial Services segment in fiscal 2013. Global revenue increased 3% in the first six months of fiscal 2013 compared with the same period of fiscal 2012, driven by growth in global small business revenue.
Other Businesses segment operating income as a percentage of related revenue increased in the first six months of fiscal 2013 compared with the same period of fiscal 2012. Segment costs and expenses were lower due to the transfer of Mint to our Financial Services segment in fiscal 2013.


28


Cost of Revenue

(Dollars in millions)
Q2
FY13
 
% of
Related
Revenue
 
Q2
FY12
 
% of
Related
Revenue
 
YTD
Q2
FY13
 
% of
Related
Revenue
 
YTD
Q2
FY12
 
% of
Related
Revenue
Cost of product revenue
$
40

 
10
%
 
$
52

 
12
%
 
$
72

 
11
%
 
$
84

 
13
%
Cost of service and other revenue
162

 
29
%
 
150

 
26
%
 
307

 
31
%
 
282

 
30
%
Amortization of acquired technology
6

 
n/a

 
3

 
n/a

 
11

 
n/a

 
6

 
n/a

Total cost of revenue
$
208

 
21
%
 
$
205

 
21
%
 
$
390

 
24
%
 
$
372

 
24
%

Cost of product revenue as a percentage of product revenue decreased in the second quarter and first six months of fiscal 2013 compared with the same periods of fiscal 2012 due to favorable product mix. Cost of service and other revenue as a percentage of service and other revenue increased in the second quarter and first six months of fiscal 2013 compared with the same periods of fiscal 2012 due to growth in QuickBooks Online and online payroll offerings and lower data center hosting costs, partially offset by higher chargeback losses from mobile offerings in our Payment Solutions business.

Operating Expenses
(Dollars in millions)
Q2
FY13
 
% of
Total
Net
Revenue
 
Q2
FY12
 
% of
Total
Net
Revenue
 
YTD
Q2
FY13
 
% of
Total
Net
Revenue
 
YTD
Q2
FY12
 
% of
Total
Net
Revenue
Selling and marketing
$
372

 
38
%
 
$
330

 
33
%
 
$
623

 
39
%
 
$
546

 
34
%
Research and development
179

 
19
%
 
164

 
16
%
 
357

 
22
%
 
327

 
21
%
General and administrative
109

 
11
%
 
95

 
10
%
 
207

 
12
%
 
187

 
12
%
Amortization of other acquired intangible assets
7

 
1
%
 
10

 
1
%
 
14

 
1
%
 
31

 
2
%
Total operating expenses
$
667

 
69
%
 
$
599

 
60
%
 
$
1,201

 
74
%
 
$
1,091

 
69
%


Current Fiscal Quarter
Total operating expenses as a percentage of total net revenue increased to 69% in the second quarter of fiscal 2013 from 60% in the same quarter of fiscal 2012. Total net revenue for the second quarter of fiscal 2013 decreased $31 million while total operating expenses excluding amortization of other acquired intangible assets increased $71 million. The increase in operating expenses included the addition of operating expenses for Demandforce, which we acquired in May 2012. Operating expenses increased about $30 million for higher staffing expenses associated with higher headcount and about $18 million for advertising and other marketing programs in our Financial Management Solutions and Consumer Tax segments.
Fiscal Year to Date
Total operating expenses as a percentage of total net revenue increased to 74% in the first six months of fiscal 2013 from 69% in the same period of fiscal 2012. Total net revenue for the first six months of fiscal 2013 grew $41 million and total operating expenses excluding amortization of other acquired intangible assets increased $127 million. The increase in operating expenses included the addition of operating expenses for Demandforce. Operating expenses increased about $76 million for higher staffing expenses associated with higher headcount and about $23 million for advertising and other marketing programs in our Financial Management Solutions and Consumer Tax segments.


29


Non-Operating Income and Expenses
Interest Expense
Interest expense of $15 million for the first six months of fiscal 2013 and $30 million for the first six months of fiscal 2012 consisted primarily of interest on senior notes that we issued in March 2007. See Note 6 to the financial statements in Part I, Item 1 of this report for more information.
Interest and Other Income, Net

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

 
$
2

 
$
1

 
$
4

Net gain (loss) on executive deferred compensation
plan assets
3

 
1

 
4

 
(1
)
Gain on disposition of stock warrants

 

 

 
10

Other
(2
)
 

 
(2
)
 
1

Total interest and other income, net
$
1

 
$
3

 
$
3

 
$
14



Interest and other income, net consists primarily of interest income and net gains on executive deferred compensation plan assets. Lower average invested balances and lower interest rates resulted in lower interest income in the second quarter and first six months of fiscal 2013 compared with the same periods of fiscal 2012. In accordance with authoritative guidance, we record gains and losses associated with executive deferred compensation plan assets in interest and other income and gains and losses associated with the related liabilities in operating expenses. The total amounts recorded in operating expenses are generally equal to the total amounts recorded in interest and other income.

In connection with our acquisition of Digital Insight Corporation in fiscal 2007, we acquired stock warrants for a privately held company. During the first quarter of fiscal 2012 that company was acquired and we recorded a gain of approximately $10 million on the disposition of the warrants.
Income Taxes
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. Our effective tax rate for the second quarter of fiscal 2013 was approximately 18% and we recorded an $8 million tax benefit on pretax income of $12 million for the first six months of fiscal 2013. Excluding discrete tax benefits primarily related to the retroactive reinstatement of the federal research and experimentation credit as described in Note 7 to the financial statements in Part I, Item 1 of this report, our effective tax rate for the second quarter and first six months of fiscal 2013 was approximately 33% and did not differ significantly from the federal statutory rate of 35%. Our effective tax rates for the second quarter and first six months of fiscal 2012 were approximately 34% and 33% and did not differ significantly from the federal statutory rate of 35%.
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. See Note 4 to the financial statements in Part I, Item 1 of this report for more information.


Liquidity and Capital Resources
Overview
At January 31, 2013, our cash, cash equivalents and investments totaled $678 million, a decrease of $66 million from July 31, 2012 due to the factors discussed under “Statements of Cash Flows” below. Our primary source of liquidity has been cash from operations, which entails the collection of accounts receivable for products and services. Our primary uses of cash have been

30


for research and development programs, selling and marketing activities, capital projects, acquisitions of businesses, debt service costs, repurchases of our common stock, and the payment of cash dividends. As discussed in “Executive Overview – Industry Trends and Seasonality” earlier in this Item 2, our business is subject to significant seasonality. The balance of our cash, cash equivalents and investments generally fluctuates with that seasonal pattern. We believe the seasonality of our business is likely to continue in the future.
The following table summarizes selected measures of our liquidity and capital resources at the dates indicated:

(Dollars in millions)
January 31,
2013
 
July 31,
2012
 
$
Change
 
%
Change
Cash, cash equivalents and investments
$
678

 
$
744

 
$
(66
)
 
(9
)%
Long-term investments
88

 
75

 
13

 
17
 %
Long-term debt
499

 
499

 

 
 %
Working capital
316

 
258

 
58

 
22
 %
Ratio of current assets to current liabilities
1.2 : 1

 
1.2 : 1

 
 
 
 


We expect to generate significant cash from operations during the rest of fiscal 2013. Since our operations are primarily domestic, approximately 80% of our cash and investments at January 31, 2013 were located in the U.S. and none of that cash was restricted. Our only significant debt consists of $500 million in senior unsecured notes due in March 2017. We also have an unused $500 million unsecured revolving line of credit facility available to us for general corporate purposes, including future acquisitions. These are both described later in this Item 2.
We evaluate, on an ongoing basis, the merits of acquiring technology or businesses, or establishing strategic relationships with and investing in other companies. Our strong liquidity profile enables us to respond nimbly to these kinds of opportunities.
Based on past performance and current expectations, we believe that our cash and cash equivalents, investments, and cash generated from operations will be sufficient to meet anticipated seasonal working capital needs, capital expenditure requirements, contractual obligations, commitments, debt service requirements, and other liquidity requirements associated with our operations for at least the next 12 months. We expect to return excess cash generated by operations to our stockholders through repurchases of our common stock and payment of cash dividends, after taking into account our operating and strategic cash needs.
Statements of Cash Flows
The following table summarizes selected items from our statements of cash flows for the first six months of each of fiscal 2013 and fiscal 2012. See the financial statements in Part I, Item 1 of this report for complete statements of cash flows for those periods.

 
Six Months Ended
(Dollars in millions)
January 31,
2013
 
January 31,
2012
 
$
Change
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
111

 
$
150

 
$
(39
)
Investing activities
(2
)
 
(65
)
 
63

Financing activities
(104
)
 
(526
)
 
422

Effect of exchange rate changes on cash
1

 
(4
)
 
5

Increase (decrease) in cash and cash equivalents
$
6

 
$
(445
)
 
$
451



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. We used part of the cash we generated from operations to pay accrued bonuses for the prior fiscal year and to fund a seasonal increase in accounts receivable. During the same period we also 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.


31


During the first six months of fiscal 2012 we generated cash from operations and from the issuance of common stock under employee stock plans. We used part of the cash we generated from operations to pay accrued bonuses for the prior fiscal year and to fund a seasonal increase in accounts receivable. During the same period we also 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.
Stock Repurchase Programs and Dividends on Common Stock
As described in Note 8 to the financial statements in Part I, Item 1 of this report, during the first six months of fiscal 2013 we continued to repurchase shares of our common stock under repurchase programs that our Board of Directors has authorized. 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. We currently expect to continue repurchasing our common stock on a quarterly basis; however, 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.
During the first six months of fiscal 2013 we also continued to pay quarterly cash dividends on shares of our outstanding common stock. 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. We currently expect to continue paying comparable cash dividends on a quarterly basis; however, 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.
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. See Note 5 to the financial statements in Part I, Item 1 of this report for a description of the key terms of this agreement, including the covenants. We remained in compliance with those 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 the credit facility. We monitor counterparty risk associated with the institutional lenders that are providing the credit facility. We currently believe that the credit facility will be available to us should we choose to borrow under it.
Cash Held by Foreign Subsidiaries
Our cash, cash equivalents and investments totaled $678 million at January 31, 2013. Of this amount, approximately 20% was held by our foreign subsidiaries and subject to repatriation tax considerations. We intend to permanently reinvest a significant portion of our earnings from foreign operations, and we currently do not anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event that funds from foreign operations are needed to fund operations in the United States, if U.S. taxes have not been previously provided on the related earnings we would provide for and pay additional U.S. taxes at the time we change our intention with regard to the reinvestment of those earnings.

Off-Balance Sheet Arrangements
At January 31, 2013, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Contractual Obligations
We presented our contractual obligations at July 31, 2012 in our Annual Report on Form 10-K for the fiscal year then ended. There were no significant changes in those obligations during the first six months of fiscal 2013.
 
Recent Accounting Pronouncements

For a description of recent accounting pronouncements, if any, and the potential impact of these pronouncements on our consolidated financial statements, see Note 1 to the financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.


32



ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Investment Risk
There has been significant deterioration and instability in the financial markets since 2008. This period of extraordinary disruption and readjustment in the financial markets has exposed us to investment risks beyond those typically inherent in investment securities. The value and liquidity of the securities in which we invest could deteriorate rapidly and the issuers of these securities could be subject to credit rating downgrades. In light of the current market conditions and these additional risks, we actively monitor market conditions and developments specific to the securities in which we invest. We believe that we take a conservative approach to investing our funds in that we invest only in highly-rated securities and diversify our portfolio of investments. While we believe we take prudent measures to mitigate investment related risks, such risks cannot be fully eliminated because of market circumstances that are outside our control.
Our investments consist of instruments that meet quality standards consistent with our investment policy. This policy specifies that, 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 by limiting our holdings with any individual issuer. We do not hold derivative financial instruments or European sovereign debt in our portfolio of investments. See Note 3 to the financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a summary of the cost and fair value of our investments by type of issue.
Interest Rate Risk
Our cash equivalents and investments are subject to market risk due to changes in interest rates. Interest rate movements affect the interest income we earn on cash equivalents and investments and the fair value of those investments. Should the Federal Reserve Target Rate increase by 25 basis points from the level of January 31, 2013, the value of our investments would decrease by approximately $1 million. Should the Federal Reserve Target Rate increase by 100 basis points from the level of January 31, 2013, the value of our investments would decrease by approximately $5 million.
We are also exposed to the impact of changes in interest rates as they affect our $500 million revolving credit facility. Advances under the credit facility accrue interest at rates that are equal to JP Morgan's alternate base rate plus a margin that ranges from 0.0% to 0.5% or the London InterBank Offered Rate (LIBOR) plus a margin that ranges from 0.9% to 1.5%, in both cases based on our senior debt credit ratings. Consequently, our interest expense would fluctuate with changes in the general level of these interest rates if we were to borrow any amounts under the credit facility. No amounts are currently outstanding under the credit facility.
On March 12, 2007 we issued $500 million of 5.75% senior unsecured notes due on March 15, 2017. We carry these senior notes at face value less unamortized discount on our balance sheets. Since these senior notes bear interest at fixed rates, we have no financial statement risk associated with changes in interest rates. However, the fair value of these notes fluctuates when interest rates change. See Note 2 and Note 6 to the financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for more information.
Impact of Foreign Currency Rate Changes
The functional currencies of our international operating subsidiaries are the local currencies. We translate the assets and liabilities of our foreign subsidiaries at the exchange rates in effect on the balance sheet date. We translate their revenue, costs and expenses at the average rates of exchange in effect during the period. We include translation gains and losses in the stockholders’ equity section of our balance sheets. We include net gains and losses resulting from foreign exchange transactions in interest and other income, net in our statements of operations.
Since we translate foreign currencies (primarily Canadian dollars, British pounds, Indian rupees and Singapore dollars) into U.S. dollars for financial reporting purposes, currency fluctuations can have an impact on our financial results. The historical impact of currency fluctuations on our financial results has generally been immaterial. We believe that our exposure to currency exchange fluctuation risk is not significant because our international subsidiaries invoice customers and satisfy their financial obligations almost exclusively in their local currencies.
Although the impact of currency fluctuations on our financial results has generally been immaterial in the past and we believe that for the reasons cited above currency fluctuations will not be significant in the future, there can be no guarantee that the impact of currency fluctuations will not be material in the future. As of January 31, 2013, we did not engage in foreign currency hedging activities.


33


ITEM 4
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based upon an evaluation of the effectiveness of disclosure controls and procedures, Intuit’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures as defined under Exchange Act Rule 13a-15(e) and 15d-15(e) were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During our most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


34


PART II
ITEM 1
LEGAL PROCEEDINGS
See Note 9 to the financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of legal proceedings.


ITEM 1A
RISK FACTORS

Forward-Looking Statements and Risk Factors
This Quarterly Report on Form 10-Q contains forward-looking 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 expectation of a shift in revenue as a result of late tax legislation;
our expectation that we will 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;
our expectation that we will continue to invest significant resources in our product development, marketing and sales capabilities in the future;
our expectation that connected services revenue as a percentage of our total revenue will continue to grow in the future;
the assumptions underlying our Critical Accounting Policies and Estimates, including our estimates regarding product rebate and return reserves; the collectability of accounts receivable; 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 belief that the investments we hold are not other-than-temporarily impaired;
our belief that the reduction in liquidity of the municipal auction rate securities we hold will not have a material impact on our overall ability to meet our liquidity needs;
our expectation that we will continue to repurchase our common stock on a quarterly basis;
our expectation that we will continue to pay a comparable cash dividend on a quarterly basis;
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 we will not need funds generated from foreign operations to fund our domestic operations;
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, commitments, 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 payment of cash dividends;
our beliefs regarding seasonality, competition and other trends that affect our businesses; and
our assessments and beliefs regarding the future outcome of pending legal proceedings and the liability, if any, that Intuit may incur as a result of those proceedings.
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

35


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 publicly revise or update any forward-looking statement for any reason.
Because forward-looking statements involve risks and uncertainties, there are important factors that may cause actual results to differ materially from those contained in the forward-looking statements. These factors include the following:
We face intense competitive pressures that may harm our operating results.
We face intense competition in all of our businesses, and we expect competition to remain intense in the future. Our competitors and potential competitors range from large and established entities to emerging start-ups. Our competitors may introduce superior products and services, reduce prices, have greater technical, marketing and other resources, have greater name recognition, have larger installed bases of customers, have well-established relationships with our current and potential customers, advertise aggressively or beat us to market with new products and services. In addition, we may face competition from existing companies, with large established consumer user-bases and broad-based platforms, who may change or expand the focus of their business strategies and target our customers, such as small businesses and financial institutions. We also face intensified competition from providers of free accounting, tax, payments, banking and other financial services. In order to compete, we have also introduced free offerings in several categories, but we may not be able to attract customers or effectively monetize all of these offerings, and customers who have formerly paid for Intuit’s products and services may elect to use free offerings instead. These competitive factors may diminish our revenue and profitability and harm our ability to acquire and retain customers.
Our consumer tax business also faces significant competition from the public sector, where we face the risk of federal and state taxing authorities developing software or other systems to facilitate tax return preparation and electronic filing at no charge to taxpayers. These or similar programs may be introduced or expanded in the future, which may cause us to lose customers and revenue. Although the Free File Alliance has kept the federal government from being a direct competitor to Intuit’s tax offerings, it has fostered additional online competition and may cause us to lose significant revenue opportunities. The current agreement with the Free File Alliance is scheduled to expire in October 2014. We anticipate that governmental encroachment at both the federal and state levels may present a continued competitive threat to our business for the foreseeable future.
Future revenue growth depends upon our ability to adapt to technological change and successfully introduce new and enhanced products, services and business models.
The software as a service (SaaS), desktop software and mobile technology industries are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. As we continue to grow our software as a service, mobile and other offerings, we must continue to innovate and develop new products and features to meet changing customer needs and attract and retain talented software developers. We need to continue to develop our skills, tools and capabilities to capitalize on existing and emerging technologies, which require us to devote significant resources.
A number of our businesses also derive a significant amount of their revenue from one-time upfront license fees and rely on customer upgrades and service offerings to generate a significant portion of their revenues. In addition, our consumer and professional tax businesses depend significantly on revenue from customers who return each year to use our updated tax preparation and filing software and services. As our existing products mature, encouraging customers to purchase product upgrades becomes more challenging unless new product releases provide features and functionality that have meaningful incremental value. If we are not able to develop and clearly demonstrate the value of new or upgraded products or services to our customers, our revenues may be harmed. In addition, as we continue to introduce and expand our new business models, including offerings that are subscription-based or that are free to end users, we may be unsuccessful in monetizing or increasing customer adoption of these offerings.
The number of people who access products and services through devices other than personal computers, including mobile phones, smartphones, and handheld computers such as tablets, has increased dramatically in the past few years. We have limited experience to date in developing products and services for users of these alternative devices, and the versions of our products and services developed for these devices may not be compelling to users. Even if we are able to attract new users through these mobile offerings, the amount of revenue that we derive per user from mobile offerings may be less than the revenue that we have historically derived from users of personal computers. As new devices and new platforms are continually being released, it is difficult to predict the problems we may encounter in developing versions of our products and services for use on these alternative devices and we may need to devote significant resources to the creation, support, and maintenance of such offerings. If we are slow to develop products and technologies that are compatible with these alternative devices, of if our competitors are able to achieve those results more quickly than us, we will fail to capture a significant share of an increasingly important portion of the market for online services, which could adversely affect our business.

36


In some cases, we may expend a significant amount of resources and management attention on offerings that do not ultimately succeed in their markets. We have encountered difficulty in launching new products and services in the past. If we misjudge customer needs in the future, our new products and services may not succeed and our revenues and earnings may be harmed. We have also invested, and in the future expect to invest, in new business models, geographies, strategies and initiatives. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, expenses associated with the initiatives and inadequate return on investments. Because these new initiatives are inherently risky, they may not be successful and may harm our financial condition and operating results.
Business interruption or failure of our information technology and communication systems may impair the availability of our products and services, which may damage our reputation and harm our future financial results.
As we continue to transition our business to more connected services, we become more dependent on the continuing operation and availability of our information technology and communication systems and those of our external service providers. We do not have redundancy for all of our systems, many of our critical applications reside in only one of our data centers, and our disaster recovery planning may not account for all eventualities. We also do not maintain real-time back-up of all our data, and in the event of significant system disruption we may experience loss of data or processing capabilities, which may cause us to lose customers and may materially harm our reputation and our operating results. In addition, we are in the process of updating our customer facing applications and the supporting information technology infrastructure to meet our customers’ expectations for continuous service availability. Any difficulties in upgrading these applications or infrastructure or failure of our systems or those of our service providers may result in interruptions in our service, which may reduce our revenues and profits, cause us to lose customers and damage our reputation. Any prolonged interruptions at any time may result in lost customers, additional refunds of customer charges, negative publicity and increased operating costs, any of which may significantly harm our business, financial condition and results of operations.
We are in the process of migrating our applications and infrastructure to new data centers. If we do not execute the transition to the new data centers in an effective manner, we may experience unplanned service disruptions or unforeseen increases in costs which may harm our operating results and our business.
Our business operations, data centers, information technology and communications systems are vulnerable to damage or interruption from natural disasters, human error, malicious attacks, fire, power loss, telecommunications failures, computer viruses, computer denial of service attacks, terrorist attacks and other events beyond our control. The majority of our research and development activities, our corporate headquarters, our principal information technology systems, and other critical business operations are located near major seismic faults. We do not carry earthquake insurance for direct quake-related losses. Our future financial results may be materially harmed in the event of a major earthquake or other natural or man-made disaster.
We rely on internal systems and external systems maintained by manufacturers, distributors and other service providers to take and fulfill customer orders, handle customer service requests and host certain online activities. Any interruption or failure of our internal or external systems may prevent us or our service providers from accepting and fulfilling customer orders or cause company and customer data to be unintentionally disclosed. Our continuing efforts to upgrade and expand our network security and other information systems as well as our high-availability capabilities may be costly, and problems with the design or implementation of system enhancements may harm our business and our results of operations.
Our hosting, collection, use and retention of personal customer information and data create risk that may harm our business.
A number of our businesses collect, use and retain large amounts of personal customer information and data, including credit card numbers, tax return information, bank account numbers and passwords, personal and business financial data, social security numbers, healthcare information and payroll information. We may also develop new business models that use certain personal information, or data derived from personal information. In addition, we collect and maintain personal information of our employees in the ordinary course of our business. Some of this personal customer and employee information is held, and some transactions are executed, by third parties. In addition, as many of our products and services are Web-based and mobile-application-based, the amount of data we store for our users on our servers and the servers of our vendors that provide hosting services (including personal information) has been increasing and will continue to increase as we further transition our businesses to connected services. We and our vendors use commercially available security technologies to protect transactions and personal information. We use security and business controls to limit access and use of personal information and require our vendors to implement similar controls. However, we may not have the ability to effectively monitor the implementation of security measures of our vendors, and, in any event, individuals or third parties may be able to circumvent these security and business measures, and errors in the storage, use or transmission of personal information may result in a breach of customer or employee privacy or theft of assets, which may require notification under applicable data privacy regulations. We employ contractors, temporary and seasonal employees who may have access to the personal information of customers and employees or who may execute transactions in the normal course of their duties. While we conduct background checks of our employees

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and other individuals and limit access to systems and data, it is possible that one or more of these individuals may circumvent these controls, resulting in a security breach.
We are subject to laws, rules and regulations relating to the collection, use, and security of user data. New laws in this area have been passed by several jurisdictions, and other jurisdictions are considering imposing additional restrictions. These new laws may be interpreted and applied inconsistently from jurisdiction to jurisdiction and our current data protection policies and practices may not be consistent with those interpretations and applications. In addition, the ability to execute transactions and the possession and use of personal information and data in conducting our business subjects us to legislative and regulatory burdens that may require notification to customers or employees of a security breach, restrict our use of personal information and hinder our ability to acquire new customers or market to existing customers. As our business continues to expand to new industry segments that may be more highly regulated for privacy and data security, and to countries outside the United States that have more strict data protection laws, our compliance requirements and costs may increase. We have incurred — and may continue to incur — significant expenses to comply with mandatory privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations.
A major breach of our security measures or those of third parties that provide hosting services for us, execute transactions or hold and manage personal information may have serious negative consequences for our businesses, including possible fines, penalties and damages, reduced customer demand for our services, harm to our reputation and brands, further regulation and oversight by federal or state agencies, and loss of our ability to provide financial transaction services or accept and process customer credit card orders or tax returns. From time to time, we detect, or receive notices from customers or public or private agencies that they have detected, vulnerabilities in our servers, our software or third-party software components that are distributed with our products. The existence of vulnerabilities, even if they do not result in a security breach, may harm customer confidence and require substantial resources to address, and we may not be able to discover or remediate such security vulnerabilities before they are exploited. In addition, hackers develop and deploy viruses, worms and other malicious software programs that may attack our offerings. Although this is an industry-wide problem that affects software across platforms, it is increasingly affecting our offerings because hackers tend to focus their efforts on the more popular programs and offerings and we expect them to continue to do so. If hackers were able to circumvent our security measures, or if we were unable to detect an intrusion into our systems and contain such intrusion in a reasonable amount of time, we may lose personal information. Although we have commercially available network and application security, internal control measures, and physical security procedures to safeguard our systems, there can be no assurance that a security breach, intrusion, loss or theft of personal information will not occur, which may harm our business, customer reputation and future financial results and may require us to expend significant resources to address these problems, including notification under data privacy regulations.
If we are unable to develop, manage and maintain critical third party business relationships, our business may be adversely affected.
Our growth is dependent on the strength of our business relationships and our ability to continue to develop, maintain and leverage new and existing relationships. We rely on various third party partners, including software and service providers, suppliers, vendors, manufacturers, distributors, contractors, financial institutions, core processors, licensing partners and development partners, among others, in many areas of our business in order to deliver our offerings and operate our business. We also rely on third parties to support the operation of our business by maintaining our physical facilities, equipment, power systems and infrastructure. In certain instances, these third party relationships are sole source or limited source relationships and can be difficult to replace or substitute depending on the level of integration of the third party’s products or services into, or with, our offerings and/or the general availability of such third party’s products and services. In addition, there may be few or no alternative third party providers or vendors in the market. Further, there can be no assurance that we will be able to adequately retain third party contractors engaged to help us operate our business. The failure of third parties to provide acceptable and high quality products, services and technologies or to update their products, services and technologies may result in a disruption to our business operations and our customers, which may reduce our revenues and profits, cause us to lose customers and damage our reputation. Alternative arrangements and services may not be available to us on commercially reasonable terms or we may experience business interruptions upon a transition to an alternative partner.
In particular, we have relationships with banks, credit unions or other financial institutions, both as customers and as suppliers of certain critical services we offer to our other customers. If macroeconomic conditions or other factors cause any of these institutions to fail, consolidate, stop providing certain services or institute cost-cutting efforts, our business and financial results may suffer and we may be unable to offer those services to our customers.
We increasingly utilize the distribution platforms of third parties like Apple's App Store and Google Play for Android for the distribution of certain of our product offerings. Although we benefit from the strong brand recognition and large user base of these distribution platforms to attract new customers, the platform owners have wide discretion to change the pricing structure, terms of service and other policies with respect to us and other developers. Any adverse changes by these third parties could adversely affect our financial results.

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Increased government regulation of our businesses may harm our operating results.
Many of our businesses are in highly regulated areas, including our tax, payroll, payments, financial services, prepaid debit card and healthcare businesses. There have been significant new regulations and heightened focus by the government on many of these areas. In addition, as we seek to grow our business, we may expand into more highly-regulated businesses or countries, which may subject us to increased regulatory scrutiny. The application of these laws and regulations to our businesses is often unclear and compliance with these regulations may involve significant costs or require changes to our business practices that result in reduced revenue. Any changes that we may incur as a result of any such regulations may not be sustained over time depending on a number of factors, including market and industry reactions to such regulations.
In order to meet regulatory standards, we may be required to increase investment in compliance and auditing functions or new technologies. In addition, government authorities may enact other laws, rules or regulations that place new burdens or restrictions on our business or determine that our operations are directly subject to existing rules or regulations, such as requirements related to data collection, use, transmission, retention, processing and security, which may make our business more costly, less efficient or impossible to conduct, and may require us to modify our current or future products or services, which may harm our future financial results.
The tax preparation industry continues to receive heightened attention from federal and state governments. New legislation, regulation, public policy considerations, litigation by the government or private entities, or new interpretations of existing laws may result in greater oversight of the tax preparation industry, restrict the types of products and services that we can offer or the prices we can charge, or otherwise cause us to change the way we operate our tax businesses or offer our tax products and services. This in turn may increase our cost of doing business and limit our revenue opportunities. In addition, if our practices are not consistent with new interpretations of existing laws, we may become subject to lawsuits, penalties, and other liabilities that did not previously apply. We are also required to comply with a variety of state revenue agency standards in order to successfully operate our tax preparation and electronic filing services. Changes in state-imposed requirements by one or more of the states, including the required use of specific technologies or technology standards, may significantly increase the costs of providing those services to our customers and may prevent us from delivering a quality product to our customers in a timely manner.
Our Financial Services business provides services to banks, credit unions and other financial institutions that are subject to extensive and complex federal and state regulation. As a result, our financial institution customers require that our products and services comply with the regulations applicable to these customers. If we are unable to comply with these regulations, we may incur significant costs and penalties, face litigation or governmental proceedings, and lose our ability to sell to these customers. Any of these adverse events may harm our future financial results and our reputation.
If we fail to process transactions effectively or fail to adequately protect against disputed or potential fraudulent activities, our revenue and earnings may be harmed.
Our operations process a significant volume and dollar value of transactions on a daily basis, especially in our payroll and payments businesses. Due to the size and volume of transactions that we handle, effective processing systems and controls are essential to ensure that transactions are handled appropriately. Despite our efforts, it is possible that we may make errors or that funds may be misappropriated due to fraud. The systems supporting our business are comprised of multiple technology platforms that are difficult to scale. If we are unable to effectively manage our systems and processes we may be unable to process customer data in an accurate, reliable and timely manner, which may harm our business. In our payments processing service business, if merchants for whom we process payment transactions are unable to pay refunds due to their customers in connection with disputed or fraudulent merchant transactions, we may be required to pay those amounts and our payments may exceed the amount of the customer reserves we have established to make such payments.
The online tax preparation, payroll administration and online payments industries have been experiencing an increasing amount of fraudulent activities by third parties. Although we do not believe that any of this activity is uniquely targeted at our business, this type of fraudulent activity may adversely impact our own operations in our consumer tax, payroll, and payments businesses. In addition to any direct damages and potential fines that may result from such fraud, which may be substantial, a loss of confidence in our controls may seriously harm our business and damage our brand. As fraud detection and prevention abilities improve across the various industries in which we operate, we may implement risk control mechanisms that could make it more difficult for legitimate customers to obtain and use our products as well as prevent the sale of our products to those parties seeking to facilitate fraudulent activity, which could result in lost revenue and negatively impact our operating results.

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Third parties claiming that we infringe their proprietary rights may cause us to incur significant legal expenses and prevent us from selling our products.
As the number of products in the software industry increases and the functionality of these products further overlap, and as we acquire technology through acquisitions or licenses, we may become increasingly subject to infringement claims, including patent, copyright, and trademark infringement claims. Litigation may be necessary to determine the validity and scope of the patent rights of others. We have received an increasing number of allegations of patent infringement claims in the past and expect to receive more claims in the future based on allegations that our offerings infringe upon patents held by third parties. Some of these claims are the subject of pending litigation against us and against some of our customers. These claims may involve patent holding companies or other adverse patent owners who have no relevant product revenues of their own, and against whom our own patents may provide little or no deterrence. The ultimate outcome of any allegation is uncertain and, regardless of outcome, any such claim, with or without merit, may be time consuming to defend, result in costly litigation, divert management’s time and attention from our business, require us to stop selling, delay shipping or redesign our products, or require us to pay monetary damages for royalty or licensing fees, or to satisfy indemnification obligations that we have with some of our customers. Our failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims may harm our business.
We rely on third party intellectual property in our products and services.
Many of our products and services include intellectual property of third parties, which we license under agreements that must be renewed or renegotiated from time to time. We may not be able to obtain licenses to these third party technologies or content on reasonable terms, or at all. If we are unable to obtain the rights necessary to use this intellectual property in our products and services, we may not be able to sell the affected offerings, and customers who are currently using the affected product may be disrupted, which may in turn harm our future financial results, damage our brand, and result in customer loss. Also, we and our customers have been and may continue to be subject to infringement claims as a result of the third party intellectual property incorporated in to our offerings. Although we try to mitigate this risk and we may not be ultimately liable for any potential infringement, pending claims require us to use significant resources, require management attention and could result in loss of customers.
Some of our offerings include third-party software that is licensed under so-called “open source” licenses, some of which may include a requirement that, under certain circumstances, we make available, or grant licenses to, any modifications or derivative works we create based upon the open source software. Although we have established internal review and approval processes to mitigate these risks, we may not be sure that all open source software is submitted for approval prior to use in our products. Many of the risks associated with usage of open source may not be eliminated, and may, if not properly addressed, harm our business.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services, and brand.
Our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us. We aggressively protect our intellectual property rights by relying on federal, state and common law rights in the U.S. and internationally, as well as a variety of administrative procedures. We also rely on contractual restrictions to protect our proprietary rights in products and services. The efforts that we take to protect our proprietary rights may not always be sufficient or effective. Protecting our intellectual property rights is costly and time consuming and may not be successful in every location. Any significant impairment of our intellectual property rights could harm our business, our brand and our ability to compete.
Policing unauthorized use and copying of our products is difficult, expensive, and time consuming. Current U.S. laws that prohibit copying give us only limited practical protection from software piracy and the laws of many other countries provide very little protection. We frequently encounter unauthorized copies of our software being sold through online marketplaces. Although we continue to evaluate and put in place technology solutions to attempt to lessen the impact of piracy and engage in efforts to educate consumers and public policy leaders on these issues and cooperate with industry groups in their efforts to combat piracy, we expect piracy to be a persistent problem that results in lost revenues and increased expenses.
Because competition for our key employees is intense, we may not be able to attract, retain and develop the highly skilled employees we need to support our planned growth.
Much of our future success depends on the continued service and availability of skilled personnel, including members of our executive team, and those in technical, marketing and staff positions. Experienced personnel in the software, mobile technologies, data security, and software as a service industries are in high demand and competition for their talents is intense, especially in California and India, where the majority of our employees are located. Also, as we strive to continue to adapt to technological change and introduce new and enhanced products and business models, we must be able to secure, maintain and

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develop the right quality and quantity of engaged and committed talent. Although we strive to be an employer of choice, we may not be able to continue to successfully attract, retain and develop key personnel which may cause our business to suffer.
As our product and service offerings become more tightly integrated, we may be required to recognize the related revenue over relatively longer periods of time.
Our expanding range of products and services, and the combinations in which we offer them, generate different revenue streams than our traditional desktop software businesses, and the accounting policies that apply to revenue from these offerings are complex. For example, as we offer more online services bundled with software products, we may be required to defer a higher percentage of our software product revenue into future fiscal periods. In addition, as we offer more services on a subscription basis, we recognize revenue from those services over the periods in which the services are provided. This may result in significant shifts of revenue from quarter to quarter, or from one fiscal year to the next.
The nature of our products and services necessitates timely product launches, and if we experience significant product quality problems or delays, it may harm our revenue, earnings and reputation.
All of our tax products and many of our non-tax products have rigid development timetables that increase the risk of errors in our products and the risk of launch delays. Our tax preparation software product development cycle is particularly challenging due to the need to incorporate unpredictable tax law and tax form changes each year and because our customers expect high levels of accuracy and a timely launch of these products to prepare and file their taxes by the tax filing deadline. Due to the complexity of our products and the condensed development cycles under which we operate, our products sometimes contain “bugs” that may unexpectedly interfere with the operation of the software. The complexity of our products may also make it difficult for us to consistently deliver offerings that contain the features, functionality and level of accuracy that our customers expect. When we encounter problems we may be required to modify our code, distribute patches to customers who have already purchased the product and recall or repackage existing product inventory in our distribution channels. If we encounter development challenges or discover errors in our products late in our development cycle it may cause us to delay our product launch date. Any major defects or launch delays may lead to loss of customers and revenue, negative publicity, customer and employee dissatisfaction, reduced retailer shelf space and promotions, and increased operating expenses, such as inventory replacement costs, legal fees or payments resulting from our commitment to reimburse penalties and interest paid by customers due solely to calculation errors in our consumer tax preparation products.
Our businesses are highly seasonal and our quarterly results could fluctuate significantly.
Several of our businesses are highly seasonal which historically has caused significant quarterly fluctuations in our financial results. Revenue and operating results are usually strongest during the second and third fiscal quarters ending January 31 and April 30 due to our tax businesses contributing most of their revenue during those quarters and the timing of the release of our small business software products and upgrades. We typically experience lower revenues, and operating losses, in the first and fourth quarters ending October 31 and July 31. Our financial results may also fluctuate from quarter to quarter and year to year due to a variety of factors, including changes in product sales mix that affect average selling prices; product release dates; the timing of delivery of federal and state tax forms; any delay in our ability to successfully submit electronically filed tax returns with government agencies; changes in consumer behavior; the timing of our discontinuation of support for older product offerings; changes to our bundling strategy, such as the inclusion of upgrades with certain offerings; changes to how we communicate the availability of new functionality in the future (any of which may impact the pattern of revenue recognition); and the timing of acquisitions, divestitures, and goodwill and acquired intangible asset impairment charges. Any fluctuations in our operating results may adversely affect our stock price.
We are frequently a party to litigation and regulatory inquiries which could result in an unfavorable outcome and have an adverse effect on our business, financial condition, results of operation and cash flows.
We are subject to various legal proceedings, claims and regulatory inquiries that have arisen out of the ordinary conduct of our business and are not yet resolved and additional claims and inquiries may arise in the future. The number and significance of these claims and inquiries have increased as our businesses have evolved. Any proceedings, claims or inquiries initiated by or against us, whether successful or not, may be time consuming; result in costly litigation, damage awards, consent decrees, injunctive relief or increased costs of business; require us to change our business practices or products; require significant amounts of management time; result in diversion of significant operations resources; or otherwise harm of business and future financial results. For further information about specific litigation, see Part II, Item 1, “Legal Proceedings.”
The continued global economic downturn may harm our business and financial condition.
The continued global economic downturn has caused disruptions and extreme volatility in global financial markets and increased rates of default and bankruptcy, and has impacted consumer and small business spending. These macroeconomic

41


developments have affected and may continue to negatively affect our business and financial condition. In particular, because the majority of our revenue is derived from sales within the U.S., economic conditions in the U.S. have an even greater impact on us than companies with a more diverse international presence. Potential new customers may not purchase or delay purchase of our products and services, and many of our existing customers may discontinue purchasing or delay upgrades of our existing products and services, thereby negatively impacting our revenues and future financial results. Decreased consumer spending levels may also reduce credit and debit card transaction processing volumes causing reductions in our payments revenue. Poor economic conditions and high unemployment has caused, and may continue to cause, a significant decrease in the number of tax returns filed, which may have a significant effect on the number of tax returns we prepare and file. In addition, weakness in the end-user consumer and small business markets may negatively affect the cash flow of our distributors and resellers who may, in turn, delay paying their obligations to us, which may increase our credit risk exposure and cause delays in our recognition of revenue or future sales to these customers. Additionally, if macroeconomic or other factors continue to cause banks, credit unions, mortgage lenders and other financial institutions to fail, or result in further cost-cutting efforts or consolidation of these entities, we may lose current or potential customers, achieve less revenue per customer and/or lose valuable relationships with such of these entities that provide critical services to our customers. Any of these events may harm our business and our future financial results.
We regularly invest resources to update and improve our internal information technology systems and software platforms. Should our investments not succeed, or if delays or other issues with new or existing internal technology systems and software platforms disrupt our operations, our business could be harmed.
We rely on our network and data center infrastructure and internal technology systems for many of our development, marketing, operational, support, sales, accounting and financial reporting activities. We are continually investing resources to update and improve these systems and environments in order to meet existing, as well as the growing and changing requirements of our business and customers. If we experience prolonged delays or unforeseen difficulties in updating and upgrading our systems and architecture, we may experience outages and may not be able to deliver certain offerings and develop new offerings and enhancements that we need to remain competitive. Such improvements and upgrades are often complex, costly and time consuming. In addition such improvements can be challenging to integrate with our existing technology systems, or may uncover problems with our existing technology systems. Unsuccessful implementation of hardware or software updates and improvements could result in outages, disruption in our business operations, loss of revenue or damage to our reputation.
Our international operations are subject to increased risks which may harm our business, operating results, and financial condition.
In addition to uncertainty about our ability to generate revenues from our foreign operations and expand into international markets, there are risks inherent in doing business internationally, including:
trade barriers and changes in trade regulations;
difficulties in developing, staffing, and simultaneously managing a large number of varying foreign operations as a result of distance, language, and cultural differences;
stringent local labor laws and regulations;
profit repatriation restrictions, and foreign currency exchange restrictions;
political or social unrest, economic instability, repression, or human rights issues;
geopolitical events, including acts of war and terrorism;
import or export regulations;
compliance with U.S. laws such as the Foreign Corrupt Practices Act, and local laws prohibiting corrupt payments to government officials;
different and more stringent user protection, data protection, privacy and other laws; and
risks related to other government regulation or required compliance with local laws.
Violations of the complex foreign and U.S. laws and regulations that apply to our international operations may result in fines, criminal actions or sanctions against us, our officers or our employees, prohibitions on the conduct of our business and damage to our reputation. Although we have implemented policies and procedures designed to promote compliance with these laws, there can be no assurance that our employees, contractors or agents will not violate our policies. These risks inherent in our international operations and expansion increase our costs of doing business internationally and may result in harm to our business, operating results, and financial condition.

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If actual product returns exceed returns reserves, our future financial results may be harmed.
We ship more desktop software products to our distributors and retailers than we expect them to sell, in order to reduce the risk that distributors or retailers may run out of products. This is particularly true for our Consumer Tax products, which have a short selling season and for which returns occur primarily in our fiscal third and fourth quarters. Like many software companies that sell their products through distributors and retailers, we have historically accepted significant product returns. We establish reserves against revenue for product returns in our financial statements based on estimated returns and we closely monitor product sales and inventory in the retail channel in an effort to maintain adequate reserves. In the past, returns have not differed significantly from these reserves. However, if we experience actual returns that significantly exceed reserves, it may result in lower net revenue.
Unanticipated changes in our income tax rates may affect our future financial results.
Our future effective income tax rates may be favorably or unfavorably affected by unanticipated changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or their interpretation. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. These continuous examinations may result in unforeseen tax-related liabilities, which may harm our future financial results.
Amortization of acquired intangible assets and impairment charges may cause significant fluctuation in our net income.
Our acquisitions have resulted in significant expenses, including amortization and impairment of acquired technology and other acquired intangible assets, and impairment of goodwill. Total costs and expenses in these categories were approximately $53 million in fiscal 2012, $85 million in fiscal 2011, and $85 million in fiscal 2010. Although under current accounting rules goodwill is not amortized, we may incur impairment charges related to the goodwill already recorded and to goodwill arising out of future acquisitions. We test the impairment of goodwill annually in our fourth fiscal quarter or more frequently if indicators of impairment arise. The timing of the formal annual test may result in charges to our statement of operations in our fourth fiscal quarter that may not have been reasonably foreseen in prior periods. The total costs and expenses for fiscal 2011 included a goodwill and intangible asset impairment charge of $30 million for our Intuit Health reporting unit. We recorded the goodwill and intangible assets for that reporting unit on our balance sheet in May 2010 in connection with our acquisition of Medfusion, Inc. At January 31, 2013, we had $2.2 billion in goodwill and $187 million in net acquired intangible assets on our balance sheet, both of which may be subject to impairment charges in the future. New acquisitions, and any impairment of the value of acquired intangible assets, may have a significant negative impact on our future financial results.
Our acquisition and divestiture activities may disrupt our ongoing business, may involve increased expenses and may present risks not contemplated at the time of the transactions.
We have acquired and may continue to acquire companies, products and technologies that complement our strategic direction. Acquisitions involve significant risks and uncertainties, including:
inability to successfully integrate the acquired technology and operations into our business and maintain uniform standards, controls, policies, and procedures;
inability to realize synergies expected to result from an acquisition;
challenges retaining the key employees, customers, resellers and other business partners of the acquired operation;
the internal control environment of an acquired entity may not be consistent with our standards and may require significant time and resources to improve;
unidentified issues not discovered in our due diligence process, including product or service quality issues, intellectual property issues and legal contingencies.
Because acquisitions and divestitures are inherently risky, our transactions may not be successful and may, in some cases, harm our operating results or financial condition. Although we typically fund our acquisitions through cash available from operations, if we were to use debt to fund acquisitions or for other purposes, our interest expense and leverage would increase significantly, and if we were to issue equity securities as consideration in an acquisition, current shareholders’ percentage ownership and earnings per share would be diluted.
We have $500 million in debt outstanding and may incur other debt in the future, which may adversely affect our financial condition and future financial results.
In fiscal 2007 we issued $500 million in senior unsecured notes due in March 2012 and $500 million in senior unsecured notes due in March 2017. We repaid the March 2012 notes when they became due using cash from operations. As the March 2017 debt matures, we will have to expend significant resources to either repay or refinance these notes. If we decide to refinance the

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notes, we may be required to do so on different or less favorable terms or we may be unable to refinance the notes at all, both of which may adversely affect our financial condition.
We have also entered into a $500 million five-year revolving credit facility. Although we have no current plans to request any advances under this credit facility, we may use the proceeds of any future borrowing for general corporate purposes, including future acquisitions.
This debt may adversely affect our financial condition and future financial results by, among other things:
increasing our vulnerability to downturns in our business, to competitive pressures and to adverse economic and industry conditions;
requiring the dedication of a portion of our expected cash from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions; and
limiting our flexibility in planning for, or reacting to, changes in our businesses and our industries.
Our current revolving credit facility imposes restrictions on us, including restrictions on our ability to create liens on our assets and the ability of our subsidiaries to incur indebtedness, and require us to maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control. In addition, our short- and long-term debt includes covenants that may adversely affect our ability to incur certain liens or engage in certain types of sale and leaseback transactions. If we breach any of the covenants under our short- and long-term debt or our revolving credit facility and do not obtain a waiver from the lenders, then, subject to applicable cure periods, any outstanding indebtedness may be declared immediately due and payable.
In addition, changes by any rating agency to our credit rating may negatively impact the value and liquidity of both our debt and equity securities. If our credit ratings are downgraded or other negative action is taken, the interest rate payable by us under our revolving credit facility may increase. In addition, any downgrades in our credit ratings may affect our ability to obtain additional financing in the future and may affect the terms of any such financing.
We are subject to risks associated with information disseminated through our services.
The laws relating to the liability of online services companies for information such as online content disseminated through their services are subject to frequent challenges. In spite of settled law in the U.S., claims are made against online services companies by parties who disagree with the content. Where our online content is accessed on the internet outside of the U.S., challenges may be brought under foreign laws which do not provide the same protections for online services companies as in the U.S. These challenges in either U.S. or foreign jurisdictions may rise to legal claims alleging defamation, libel, invasion of privacy, negligence, copyright or trademark infringement, or other theories based on the nature and content of the materials disseminated through the services. Certain of our services include content generated by users of our online services. Although this content is not generated by us, claims of defamation or other injury may be made against us for that content. Any costs incurred as a result of this potential liability may harm our business.
Our stock price may be volatile and your investment could lose value.
Our stock price is subject to changes in recommendations or earnings estimates by financial analysts, changes in investors' or analysts' valuation measures for our stock, our credit ratings and market trends unrelated to our performance. Furthermore, speculation in the press or investment community about our strategic position, financial condition, results of operations, business or security of our products, can cause changes in our stock price. These factors, as well as general economic and political conditions and the timing of announcements in the public market regarding new products, product enhancements or technological advances by our competitors or us, and any announcements by us of acquisitions, major transactions, or management changes may adversely affect our stock price. Further, any changes in the amounts or frequency of share repurchases or dividends may also adversely affect our stock price. A significant drop in our stock price could expose us to the risk of securities class actions lawsuits, which may result in substantial costs and divert management's attention and resources, which may adversely affect our business.
Our business depends on our strong reputation and the value of our brands.
Developing and maintaining awareness of our brands is critical to achieving widespread acceptance of our existing and future products and services and is an important element in attracting new customers. Adverse publicity (whether or not justified) relating to events or activities attributed to us, our employees or agents may tarnish our reputation and reduce the value of our brands. Damage to our reputation and loss of brand equity may reduce demand for our products and services and thus have an adverse effect on our future financial results, as well as require additional resources to rebuild our reputation and restore the value of the brands.

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ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Stock repurchase activity during the three months ended January 31, 2013 was as follows:

Period
 
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number
of Shares
Purchased
as Part of
Publicly
Announced
Plans
 
Approximate
Dollar Value
of Shares
That May Yet
Be Purchased
Under
the Plans
November 1, 2012 through November 30, 2012
 
840,000

 
$
59.55

 
840,000

 
$
1,590,037,922

December 1, 2012 through December 31, 2012
 
779,800

 
$
60.43

 
779,800

 
$
1,542,914,795

January 1, 2013 through January 31, 2013
 
46,565

 
$
61.33

 
46,565

 
$
1,540,059,014

Total
 
1,666,365

 
$
60.01

 
1,666,365

 
 

Notes:
1.
All of the shares purchased as part of publicly announced plans during the three months ended January 31, 2013 were purchased under a plan we announced on August 18, 2011 under which we are authorized to repurchase up to $2 billion of our common stock from time to time over a three-year period ending on August 15, 2014. At January 31, 2013, authorization from our Board of Directors to expend up to $1.5 billion remained available under that plan.


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ITEM 6
EXHIBITS
We have filed the following exhibits as part of this report:

Exhibit
Number
 
Exhibit Description
 
Filed
Herewith
 
Incorporated by
Reference
 
 
 
 
 
 
 
10.01+
 
Form of Director Restricted Stock Units Initial Grant Agreement

 
X
 
 
 
 
 
 
 
 
 
10.02+
 
Form of Director Restricted Stock Units Initial Grant Agreement for Mid-Year Directors

 
X
 
 
 
 
 
 
 
 
 
10.03+
 
Form of Director Restricted Stock Units Succeeding Grant Agreement

 
X
 
 
 
 
 
 
 
 
 
10.04+
 
Form of Director Restricted Stock Units Succeeding Grant Agreement for Mid-Year Directors

 
X
 
 
 
 
 
 
 
 
 
10.05+
 
Form of Director Restricted Stock Units Conversion Grant Agreement

 
X
 
 
 
 
 
 
 
 
 
31.01
 
Certification of Chief Executive Officer
 
X
 
 
 
 
 
 
 
 
 
31.02
 
Certification of Chief Financial Officer
 
X
 
 
 
 
 
 
 
 
 
32.01*
 
Section 1350 Certification (Chief Executive Officer)
 
X
 
 
 
 
 
 
 
 
 
32.02*
 
Section 1350 Certification (Chief Financial Officer)
 
X
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
X
 
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
X
 
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
X
 
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
X
 
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
X
 
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
X
 
 
________________________________
 
 
+
Indicates a management contract or compensatory plan or arrangement.
*
This exhibit is intended to be furnished and shall not be deemed “filed” for purposes of the Securities Exchange Act of 1934, as amended.


46


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
INTUIT INC.
(Registrant)
 
 
Date:
March 1, 2013
By:  
/s/ R. NEIL WILLIAMS  
 
 
 
 
R. Neil Williams 
 
 
 
 
Senior Vice President and Chief Financial Officer (Authorized Officer and Principal Financial Officer) 
 


47


EXHIBIT INDEX

Exhibit
Number
 
Exhibit Description
 
Filed
Herewith
 
Incorporated by
Reference
 
 
 
 
 
 
 
10.01+
 
Form of Director Restricted Stock Units Initial Grant Agreement

 
X
 
 
 
 
 
 
 
 
 
10.02+
 
Form of Director Restricted Stock Units Initial Grant Agreement for Mid-Year Directors

 
X
 
 
 
 
 
 
 
 
 
10.03+
 
Form of Director Restricted Stock Units Succeeding Grant Agreement

 
X
 
 
 
 
 
 
 
 
 
10.04+
 
Form of Director Restricted Stock Units Succeeding Grant Agreement for Mid-Year Directors

 
X
 
 
 
 
 
 
 
 
 
10.05+
 
Form of Director Restricted Stock Units Conversion Grant Agreement

 
X
 
 
 
 
 
 
 
 
 
31.01
 
Certification of Chief Executive Officer
 
X
 
 
 
 
 
 
 
 
 
31.02
 
Certification of Chief Financial Officer
 
X
 
 
 
 
 
 
 
 
 
32.01*
 
Section 1350 Certification (Chief Executive Officer)
 
X
 
 
 
 
 
 
 
 
 
32.02*
 
Section 1350 Certification (Chief Financial Officer)
 
X
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
X
 
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
X
 
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
X
 
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
X
 
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
X
 
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
X
 
 
________________________________
 
 
+
Indicates a management contract or compensatory plan or arrangement.
*
This exhibit is intended to be furnished and shall not be deemed “filed” for purposes of the Securities Exchange Act of 1934, as amended.


48