INTUIT INC - FORM 10-Q - May 24, 2016

Attached files

file filename
EX-32.02 - EXHIBIT 32.02 - INTUIT INCexhibit3202-fy16q3.htm
EX-32.01 - EXHIBIT 32.01 - INTUIT INCexhibit3201-fy16q3.htm
EX-31.02 - EXHIBIT 31.02 - INTUIT INCexhibit3102-fy16q3.htm
EX-31.01 - EXHIBIT 31.01 - INTUIT INCexhibit3101-fy16q3.htm
EX-10.01 - EXHIBIT 10.01 - INTUIT INCexhibit1001.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-Q
þ
 
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
For the quarterly period ended April 30, 2016
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 þ 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 þ 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 þ
 
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 þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 255,871,261 shares of Common Stock, $0.01 par value, were outstanding at May 18, 2016.
 


INTUIT INC.
FORM 10-Q
INDEX

 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-10.01
 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, 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
 
Nine Months Ended
(In millions, except per share amounts)
April 30,
2016
 
April 30,
2015
 
April 30,
2016
 
April 30,
2015
Net revenue:
 
 
 
 
 
 
 
Product
$
459

 
$
442

 
$
994

 
$
865

Service and other
1,845

 
1,693

 
2,946

 
2,631

Total net revenue
2,304

 
2,135

 
3,940

 
3,496

Costs and expenses:
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
Cost of product revenue
30

 
33

 
99

 
108

Cost of service and other revenue
181

 
161

 
465

 
419

Amortization of acquired technology
5

 
8

 
17

 
22

Selling and marketing
423

 
413

 
1,023

 
1,008

Research and development
228

 
206

 
646

 
583

General and administrative
149

 
131

 
386

 
365

Amortization of other acquired intangible assets
3

 
3

 
6

 
9

Goodwill impairment charge
—

 
114

 
—

 
114

Total costs and expenses
1,019

 
1,069

 
2,642

 
2,628

Operating income from continuing operations
1,285

 
1,066

 
1,298

 
868

Interest expense
(10
)
 
(7
)
 
(26
)
 
(21
)
Interest and other income (expense), net
2

 
1

 
(7
)
 
3

Income before income taxes
1,277

 
1,060

 
1,265

 
850

Income tax provision
429

 
404

 
419

 
335

Net income from continuing operations
848

 
656

 
846

 
515

Net income (loss) from discontinued operations
178

 
(155
)
 
173

 
(164
)
Net income
$
1,026

 
$
501

 
$
1,019

 
$
351

 
 
 
 
 
 
 
 
Basic net income per share from continuing operations
$
3.30

 
$
2.37

 
$
3.21

 
$
1.82

Basic net income (loss) per share from discontinued operations
0.70

 
(0.56
)
 
0.65

 
(0.58
)
Basic net income per share
$
4.00

 
$
1.81

 
$
3.86

 
$
1.24

Shares used in basic per share calculations
257

 
277

 
264

 
282

 
 
 
 
 
 
 
 
Diluted net income per share from continuing operations
$
3.26

 
$
2.33

 
$
3.17

 
$
1.79

Diluted net income (loss) per share from discontinued operations
0.68

 
(0.55
)
 
0.64

 
(0.57
)
Diluted net income per share
$
3.94

 
$
1.78

 
$
3.81

 
$
1.22

Shares used in diluted per share calculations
260

 
282

 
267

 
288

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.30

 
$
0.25

 
$
0.90

 
$
0.75

See accompanying notes.

3

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

 
Three Months Ended
 
Nine Months Ended
(In millions)
April 30,
2016
 
April 30,
2015
 
April 30,
2016
 
April 30,
2015
 
 
 
 
 
 
 
 
Net income
$
1,026

 
$
501

 
$
1,019

 
$
351

Other comprehensive income (loss), net of income taxes:
 
 
 
 
 
 
 
Foreign currency translation gains (losses)
16

 
2

 
4

 
(18
)
Total other comprehensive income (loss), net
16

 
2

 
4

 
(18
)
Comprehensive income
$
1,042

 
$
503

 
$
1,023

 
$
333



See accompanying notes.


4

INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
April 30,
2016
 
July 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,289

 
$
808

Investments
324

 
889

Accounts receivable, net
214

 
91

Income taxes receivable
4

 
84

Deferred income taxes
—

 
231

Prepaid expenses and other current assets
108

 
94

Current assets of discontinued operations
—

 
26

Current assets before funds held for customers
1,939

 
2,223

Funds held for customers
372

 
337

Total current assets
2,311

 
2,560

Long-term investments
28

 
27

Property and equipment, net
989

 
682

Goodwill
1,282

 
1,266

Acquired intangible assets, net
57

 
87

Long-term deferred income taxes
165

 
5

Other assets
108

 
106

Long-term assets of discontinued operations
—

 
235

Total assets
$
4,940

 
$
4,968

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
500

 
$
—

Accounts payable
270

 
190

Accrued compensation and related liabilities
228

 
283

Deferred revenue
854

 
691

Income taxes payable
442

 
7

Other current liabilities
199

 
143

Current liabilities of discontinued operations
—

 
93

Current liabilities before customer fund deposits
2,493

 
1,407

Customer fund deposits
372

 
337

Total current liabilities
2,865

 
1,744

Long-term debt
500

 
500

Long-term deferred revenue
174

 
152

Other long-term obligations
153

 
172

Long-term obligations of discontinued operations
—

 
68

Total liabilities
3,692

 
2,636

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock
—

 
—

Common stock and additional paid-in capital
4,334

 
4,010

Treasury stock, at cost
(9,865
)
 
(7,675
)
Accumulated other comprehensive loss
(26
)
 
(30
)
Retained earnings
6,805

 
6,027

Total stockholders’ equity
1,248

 
2,332

Total liabilities and stockholders’ equity
$
4,940

 
$
4,968

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
Loss
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2015
277,706

 
$
4,010

 
$
(7,675
)
 
$
(30
)
 
$
6,027

 
$
2,332

Comprehensive income
—

 
—

 
—

 
4

 
1,019

 
1,023

Issuance of stock under employee stock plans
2,767

 
89

 
—

 
—

 
—

 
89

Stock repurchases under stock repurchase programs
(24,085
)
 
—

 
(2,190
)
 
—

 
—

 
(2,190
)
Dividends and dividend rights declared ($0.90 per share)
—

 
—

 
—

 
—

 
(241
)
 
(241
)
Tax benefit from share-based compensation plans
—

 
30

 
—

 
—

 
—

 
30

Share-based compensation expense
—

 
205

 
—

 
—

 
—

 
205

Balance at April 30, 2016
256,388

 
$
4,334

 
$
(9,865
)
 
$
(26
)
 
$
6,805

 
$
1,248


(In millions, except shares in thousands)
Shares of
Common
Stock
 
Common
Stock and
Additional
Paid-In
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at July 31, 2014
284,950

 
$
3,561

 
$
(6,430
)
 
$
(2
)
 
$
5,949

 
$
3,078

Comprehensive income
—

 
—

 
—

 
(18
)
 
351

 
333

Issuance of stock under employee stock plans
4,431

 
129

 
—

 
—

 
—

 
129

Stock repurchases under stock repurchase programs
(13,723
)
 
—

 
(1,236
)
 
—

 
—

 
(1,236
)
Dividends and dividend rights declared ($0.75 per share)
—

 
—

 
—

 
—

 
(218
)
 
(218
)
Tax benefit from share-based compensation plans
—

 
51

 
—

 
—

 
—

 
51

Share-based compensation expense
—

 
184

 
—

 
—

 
—

 
184

Balance at April 30, 2015
275,658

 
$
3,925

 
$
(7,666
)
 
$
(20
)
 
$
6,082

 
$
2,321



See accompanying notes.

6

INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended
(In millions)
April 30,
2016
 
April 30,
2015
Cash flows from operating activities:
 
 
 
Net income
$
1,019

 
$
351

 Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
145

 
115

Amortization of acquired intangible assets
30

 
55

Goodwill impairment charge
—

 
263

Share-based compensation expense
200

 
184

Pre-tax gain on sale of discontinued operations
(354
)
 
—

Deferred income taxes
40

 
(3
)
Tax benefit from share-based compensation plans
30

 
51

Excess tax benefit from share-based compensation plans
(30
)
 
(51
)
Other
11

 
(3
)
Total adjustments
72

 
611

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(125
)
 
(76
)
Income taxes receivable
79

 
27

Prepaid expenses and other assets
(15
)
 
18

Accounts payable
77

 
125

Accrued compensation and related liabilities
(69
)
 
(29
)
Deferred revenue
213

 
407

Income taxes payable
435

 
224

Other liabilities
25

 
64

Total changes in operating assets and liabilities
620

 
760

Net cash provided by operating activities
1,711

 
1,722

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale debt securities
(589
)
 
(785
)
Sales of available-for-sale debt securities
990

 
534

Maturities of available-for-sale debt securities
160

 
406

Net change in money market funds and other cash equivalents held
 to satisfy customer fund obligations
(35
)
 
(41
)
Net change in customer fund deposits
35

 
41

Purchases of property and equipment
(449
)
 
(183
)
Acquisitions of businesses, net of cash acquired
—

 
(95
)
Proceeds from divestiture of businesses
463

 
—

Other
3

 
28

Net cash provided by (used in) investing activities
578

 
(95
)
Cash flows from financing activities:
 
 
 
Proceeds from borrowings under revolving credit facilities
995

 
—

Repayments on borrowings under revolving credit facilities
(995
)
 
—

Proceeds from long-term debt
500

 
—

Net proceeds from issuance of stock under employee stock plans
89

 
129

Cash paid for purchases of treasury stock
(2,190
)
 
(1,234
)
Dividends and dividend rights paid
(238
)
 
(212
)
Excess tax benefit from share-based compensation plans
30

 
51

Other
(5
)
 
—

Net cash used in financing activities
(1,814
)
 
(1,266
)
Effect of exchange rates on cash and cash equivalents
6

 
(17
)
Net increase in cash and cash equivalents
481

 
344

Cash and cash equivalents at beginning of period
808

 
849

Cash and cash equivalents at end of period
$
1,289

 
$
1,193

_________________________
Because the cash flows of our discontinued operations were not material for any period presented, we have not segregated the cash flows of those businesses on these statements of cash flows. See Note 4, “Discontinued Operations,” for more information.
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, and accounting professionals. With flagship products and services that include QuickBooks and TurboTax, we help customers solve important business and financial management problems such as running a small business, paying bills, and filing income taxes. ProSeries and Lacerte are Intuit’s tax preparation offerings for professional accountants. Incorporated in 1984 and headquartered in Mountain View, California, we sell our products and services primarily in the United States.
Basis of Presentation
These condensed consolidated financial statements include the financial statements of Intuit and its wholly owned subsidiaries. We have eliminated all significant intercompany balances and transactions in consolidation. We have included all adjustments, consisting only of normal recurring items, which we considered necessary for a fair presentation of our financial results for the interim periods presented. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to discontinued operations and reportable segments. See Note 4, “Discontinued Operations,” and Note 10, “Segment Information,” for more information.
As discussed in Note 4, we sold our Demandforce, QuickBase, and Quicken businesses in the third quarter of fiscal 2016. We have reclassified our statements of operations for all periods presented to reflect these businesses as discontinued operations. We have also segregated the net assets of these businesses from continuing operations on our balance sheet at July 31, 2015. Because the cash flows of these businesses were not material for any period presented, we have not segregated them on our statements of cash flows. 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, 2015. Results for the nine months ended April 30, 2016 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2016 or any other future period.
Seasonality
Our Consumer Tax offerings have significant seasonal patterns and revenue from those income tax preparation products and services is heavily concentrated in our third fiscal quarter ending April 30.
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, 2015. There have been no changes to our significant accounting policies during the first nine months of fiscal 2016.
Use of Estimates

In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP), we make certain estimates and assumptions that affect the amounts reported in our financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the appropriate levels of reserves for product returns and rebates, the collectibility of accounts receivable, the appropriate levels of various accruals including accruals for litigation contingencies, the amount of our worldwide tax provision, and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and fair values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
Computation of Net Income (Loss) Per Share
We compute basic net income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the shares issuable upon the exercise of stock options and upon the vesting of restricted stock units (RSUs) under the treasury stock method.

8

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 combined 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 combined 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.
All of the RSUs we grant have dividend rights. Dividend rights are accumulated and paid when the underlying RSUs vest. Since the dividend rights are subject to the same vesting requirements as the underlying equity awards they are considered a contingent transfer of value. Consequently, the RSUs are not considered participating securities and we do not present them separately in earnings per share.
In loss periods, basic net loss per share and diluted net loss per share are the same since the effect of potential common shares is anti-dilutive and therefore excluded.
The following table presents the composition of shares used in the computation of basic and diluted net income (loss) per share for the periods indicated.
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
April 30,
2016
 
April 30,
2015
 
April 30,
2016
 
April 30,
2015
Numerator:
 
 
 
 
 
 
 
Net income from continuing operations
$
848

 
$
656

 
$
846

 
$
515

Net income (loss) from discontinued operations
178

 
(155
)
 
173

 
(164
)
Net income
$
1,026

 
$
501

 
$
1,019

 
$
351

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Shares used in basic per share amounts:
 
 
 
 
 
 
 
Weighted average common shares outstanding
257

 
277

 
264

 
282

 
 
 
 
 
 
 
 
Shares used in diluted per share amounts:
 
 
 
 
 
 
 
Weighted average common shares outstanding
257

 
277

 
264

 
282

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

 
5

 
3

 
6

Dilutive weighted average common shares outstanding
260

 
282

 
267

 
288

 
 
 
 
 
 
 
 
Basic and diluted net income per share:
 
 
 
 
 
 
 
Basic net income per share from continuing operations
$
3.30

 
$
2.37

 
$
3.21

 
$
1.82

Basic net income (loss) per share from discontinued operations
0.70

 
(0.56
)
 
0.65

 
(0.58
)
Basic net income per share
$
4.00

 
$
1.81

 
$
3.86

 
$
1.24

 
 
 
 
 
 
 
 
Diluted net income per share from continuing operations
$
3.26

 
$
2.33

 
$
3.17

 
$
1.79

Diluted net income (loss) per share from discontinued operations
0.68

 
(0.55
)
 
0.64

 
(0.57
)
Diluted net income per share
$
3.94

 
$
1.78

 
$
3.81

 
$
1.22

 
 
 
 
 
 
 
 
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
2

 
—

 
2

 
2


9

Concentration of Credit Risk and Significant Customers
No customer accounted for 10% or more of total net revenue in the three or nine months ended April 30, 2016 or April 30, 2015. No customer accounted for 10% or more of gross accounts receivable at April 30, 2016 or July 31, 2015.
Recent Accounting Pronouncements
ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”
In March 2016 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 is designed to simplify several aspects of accounting for share-based payment award transactions, which include the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2017. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2016-09 on our consolidated financial statements.
ASU 2016-02, “Leases (Topic 842)”
In February 2016 the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2019. Early adoption is permitted. This ASU is required to be adopted using a modified retrospective approach. We are currently evaluating the impact of our pending adoption of ASU 2016-02 on our consolidated financial statements.
ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”
In September 2015 the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 eliminates the requirement for an acquirer to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed as of the acquisition date and that, if known, would have affected measurement or recognition of amounts initially recognized. As an alternative, the amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the financial statements of the period in which adjustments to provisional amounts are determined, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 is effective prospectively for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2016. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2015-16 on our consolidated financial statements.
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”
In May 2014 the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” and in August 2015 the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year. ASU 2014-09 supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than is required under present U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 is effective for reporting periods beginning after December 15, 2017, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2018. Early adoption of one year prior to the required effective date is permitted. ASU 2014-09 allows adoption using either of two methods: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients; or

10

(ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.
We do not expect that any other recently issued accounting pronouncements will have a significant effect on our 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 unobservable inputs that are supported by little or no market activity and that are significant to the determination of fair value. Level 3 assets and liabilities include those whose fair values are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.

11

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.
 
April 30, 2016
 
July 31, 2015
(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
$
729

 
$
—

 
$
—

 
$
729

 
$
695

 
$
—

 
$
—

 
$
695

Available-for-sale debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
—

 
175

 
—

 
175

 
—

 
506

 
—

 
506

Corporate notes
—

 
241

 
—

 
241

 
—

 
546

 
—

 
546

U.S. agency securities
—

 
83

 
—

 
83

 
—

 
12

 
—

 
12

Municipal auction rate securities
—

 
—

 
15

 
15

 
—

 
—

 
15

 
15

Total available-for-sale securities
—

 
499

 
15

 
514

 
—

 
1,064

 
15

 
1,079

Total assets measured at fair value on a recurring basis
$
729

 
$
499

 
$
15

 
$
1,243

 
$
695

 
$
1,064

 
$
15

 
$
1,774

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior notes (1)
$
—

 
$
520

 
$
—

 
$
520

 
$
—

 
$
531

 
$
—

 
$
531

______________________________
(1)
Carrying value on our balance sheets at April 30, 2016 was $500 million and at July 31, 2015 was $500 million. See Note 5, “Current Liabilities – Short-Term Debt,” for more information.
The following table summarizes our cash equivalents and available-for-sale debt securities by balance sheet classification and level in the fair value hierarchy at the dates indicated.
 
April 30, 2016
 
July 31, 2015
(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
$
532

 
$
—

 
$
—

 
$
532

 
$
533

 
$
—

 
$
—

 
$
533

In funds held for customers
197

 
—

 
—

 
197

 
162

 
—

 
—

 
162

Total cash equivalents
$
729

 
$
—

 
$
—

 
$
729

 
$
695

 
$
—

 
$
—

 
$
695

Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
In investments
$
—

 
$
324

 
$
—

 
$
324

 
$
—

 
$
889

 
$
—

 
$
889

In funds held for customers
—

 
175

 
—

 
175

 
—

 
175

 
—

 
175

In long-term investments
—

 
—

 
15

 
15

 
—

 
—

 
15

 
15

Total available-for-sale securities
$
—

 
$
499

 
$
15

 
$
514

 
$
—

 
$
1,064

 
$
15

 
$
1,079

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.

12

Financial liabilities whose fair values we measure using Level 2 inputs consist of senior unsecured notes. See Note 5, “Current Liabilities – Short-Term Debt,” 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. We estimate the fair values of the auction rate securities using a discounted cash flow model. We continue to classify them as long-term investments based on the maturities of the underlying securities at that date. We do not intend to sell our municipal auction rate securities. In addition, it is more likely than not that we will not be required to sell them before recovery at par, which may be at maturity.
There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the nine months ended April 30, 2016.


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 at July 31, 2015 consisted of available-for-sale investment-grade debt securities that we carried at fair value. Funds held for customers consist of cash and cash equivalents and investment grade available-for-sale debt securities in all periods presented. 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.
 
April 30, 2016
 
July 31, 2015
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Classification on balance sheets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,289

 
$
1,289

 
$
808

 
$
808

Investments
324

 
324

 
890

 
889

Funds held for customers
372

 
372

 
337

 
337

Long-term investments
28

 
28

 
27

 
27

Total cash and cash equivalents, investments, and funds
held for customers
$
2,013

 
$
2,013

 
$
2,062

 
$
2,061


13

The following table summarizes our cash and cash equivalents, investments, and funds held for customers by investment category at the dates indicated.
 
April 30, 2016
 
July 31, 2015
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Type of issue:
 
 
 
 
 
 
 
Total cash and cash equivalents
$
1,486

 
$
1,486

 
$
970

 
$
970

Available-for-sale debt securities:
 
 
 
 
 
 
 
Municipal bonds
175

 
175

 
507

 
506

Corporate notes
241

 
241

 
546

 
546

U.S. agency securities
83

 
83

 
12

 
12

Municipal auction rate securities
15

 
15

 
15

 
15

Total available-for-sale debt securities
514

 
514

 
1,080

 
1,079

Other long-term investments
13

 
13

 
12

 
12

Total cash and cash equivalents, investments, and funds
held for customers
$
2,013

 
$
2,013

 
$
2,062

 
$
2,061

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 or expense, net in our statements of operations. Gross realized gains and losses on our available-for-sale debt securities for the three and nine months ended April 30, 2016 and April 30, 2015 were not significant.
We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in accumulated other comprehensive income or loss in the stockholders’ equity section of our balance sheets. Gross unrealized gains and losses on our available-for-sale debt securities at April 30, 2016 and July 31, 2015 were not significant.
We periodically review our investment portfolios to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns. We believe that the investments we held at April 30, 2016 were not other-than-temporarily impaired. Unrealized losses on available-for-sale debt securities at April 30, 2016 were not significant and were due to changes in interest rates, including market credit spreads, and not due to increased credit risks associated with specific securities. We do not intend to sell these investments. In addition, it is more likely than not that we will not be required to sell them before recovery at par, which may be at maturity.
The following table summarizes our available-for-sale debt securities classified by the stated maturity date of the security at the dates indicated.
 
April 30, 2016
 
July 31, 2015
(In millions)
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
Due within one year
$
189

 
$
189

 
$
434

 
$
435

Due within two years
125

 
125

 
443

 
442

Due within three years
75

 
75

 
156

 
156

Due after three years
125

 
125

 
47

 
46

Total available-for-sale debt securities
$
514

 
$
514

 
$
1,080

 
$
1,079

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 interest reset dates or mandatory call dates within three years of the dates indicated in the table.



14

4.
Discontinued Operations
On February 1, 2016 we completed the sale of our Demandforce business. On April 1, 2016 we completed the sales of our QuickBase and Quicken businesses. We received $463 million in cash and recorded a $354 million pre-tax gain on the disposal of these three businesses. The pre-tax gain was partially offset by a related income tax provision of $178 million, resulting in a net gain on disposal of $176 million in the third quarter of fiscal 2016.
We classified our Demandforce, QuickBase, and Quicken businesses as discontinued operations and have therefore segregated their operating results from continuing operations in our statements of operations for all periods presented. We have also segregated the net assets of these businesses from continuing operations on our balance sheet at July 31, 2015. Because the cash flows of these businesses were not material for any period presented, we have not segregated them on our statements of cash flows. Demandforce and QuickBase were part of our Small Business segment and Quicken was part of our former Consumer segment.
Net revenue from discontinued operations, income (loss) from discontinued operations before income taxes, and the components of net income (loss) from discontinued operations were as follows for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
(In millions)
April 30,
2016
 
April 30,
2015
 
April 30,
2016
 
April 30,
2015
Net revenue from discontinued operations:
 
 
 
 
 
 
 
Demandforce
$
—

 
$
28

 
$
49

 
$
89

QuickBase
14

 
18

 
54

 
52

Quicken
8

 
13

 
34

 
38

Total net revenue from discontinued operations
$
22

 
$
59

 
$
137

 
$
179

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations before income taxes:
 
 
 
 
 
 
 
Demandforce
$
—

 
$
(18
)
 
$
(10
)
 
$
(46
)
QuickBase
4

 
3

 
10

 
10

Quicken
(1
)
 
(146
)
 
(2
)
 
(139
)
Total income (loss) from discontinued operations before income taxes
$
3

 
$
(161
)
 
$
(2
)
 
$
(175
)
 
 
 
 
 
 
 
 
Net income (loss) from discontinued operations:
 
 
 
 
 
 
 
Net loss from Demandforce operations
$
—

 
$
(9
)
 
$
(6
)
 
$
(28
)
Net income from QuickBase operations
2

 
1

 
6

 
6

Net loss from Quicken operations
—

 
(147
)
 
—

 
(142
)
Net gain on disposal of Demandforce, QuickBase, and Quicken
176

 
—

 
173

 
—

Total net income (loss) from discontinued operations
$
178

 
$
(155
)
 
$
173

 
$
(164
)


5.
Current Liabilities
Short-Term Debt
On March 12, 2007 we issued $500 million of 5.75% senior unsecured notes due on March 15, 2017. We carried these notes at face value less the unamortized discount on our balance sheets at April 30, 2016 and July 31, 2015. Because their contractual maturities are now within one year, we transferred the notes from long-term liabilities to current liabilities during the third quarter of fiscal 2016. The 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 remained in compliance with these covenants at all times during the quarter ended April 30, 2016. Interest on the notes is payable semi-annually on March 15 and September 15. We paid $29 million in cash for interest on the notes during the nine months ended April 30, 2016 and $29 million in cash for interest on the notes during the nine months ended April 30, 2015.

15

Unsecured Revolving Credit Facilities
On February 17, 2012 we entered into an agreement with certain institutional lenders for an unsecured revolving credit facility that was due to expire on February 17, 2017. On February 1, 2016 the $745 million outstanding balance was paid in full and the credit facility was terminated.
On February 1, 2016 we entered into a master credit agreement with certain institutional lenders for a new five-year credit facility in an aggregate principal amount of $1.5 billion. The master credit agreement includes a $500 million unsecured term loan and a $1 billion unsecured revolving credit facility that will expire on February 1, 2021. See Note 6, “Long-Term Obligations and Commitments – Long-Term Debt,” for more information regarding the term loan. Under the new master credit agreement we may, subject to certain customary conditions, on one or more occasions increase commitments under the revolving credit facility in an amount not to exceed $250 million in the aggregate and may extend the maturity date up to two times. Advances under the revolving credit facility accrue interest at rates that are equal to, at our election, either Bank of America's alternate base rate plus a margin that ranges from 0.0% to 0.5% or the London Interbank Offered Rate (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 master credit agreement includes customary affirmative and negative covenants, including financial covenants that require us to maintain a ratio of total debt to annual earnings before interest, taxes, depreciation and amortization (EBITDA) of not greater than 3.25 to 1.00 as of any date and a ratio of annual EBITDA to annual interest expense of not less than 3.00 to 1.00 as of the last day of each fiscal quarter. We remained in compliance with these covenants at all times during the quarter ended April 30, 2016. During the third quarter of fiscal 2016 we borrowed and repaid $250 million under this revolving credit facility and at April 30, 2016 no amounts were outstanding.
Other Current Liabilities
Other current liabilities were as follows at the dates indicated:
(In millions)
April 30,
2016
 
July 31,
2015
Reserve for product returns
$
32

 
$
12

Reserve for rebates
26

 
12

Current portion of license fee payable
10

 
10

Current portion of deferred rent
7

 
8

Interest payable
4

 
10

Executive deferred compensation plan liabilities
67

 
63

Other
53

 
28

Total other current liabilities
$
199

 
$
143

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 and Commitments
Long-Term Debt
On February 1, 2016 we entered into a master credit agreement with certain institutional lenders for a new five-year credit facility in an aggregate principal amount of $1.5 billion. The master credit agreement includes a $500 million unsecured term loan and a $1 billion unsecured revolving credit facility that will expire on February 1, 2021. See Note 5, “Current Liabilities – Unsecured Revolving Credit Facilities,” for more information regarding the revolving credit facility. Under the master credit agreement we may, subject to certain customary conditions, on one or more occasions increase commitments under the term loan in an amount not to exceed $500 million in the aggregate. The term loan accrues interest at rates that are equal to, at our election, either Bank of America's alternate base rate plus a margin that ranges from 0.125% to 0.875% or LIBOR plus a margin that ranges from 1.125% to 1.875%. Actual margins under either election will be based on our senior debt credit ratings. The master credit agreement includes customary affirmative and negative covenants. See Note 5, “Current Liabilities – Unsecured Revolving Credit Facilities,” for more information. The term loan is subject to quarterly principal payments of 2.5% of the loan amount beginning in July 2017, with the balance payable on February 1, 2021. At April 30, 2016, $500 million was outstanding under the term loan. Interest on the term loan is payable monthly. We paid $1 million in cash for interest on the term loan during the three months ended April 30, 2016.

16

Other Long-Term Obligations
Other long-term obligations were as follows at the dates indicated:
(In millions)
April 30,
2016
 
July 31,
2015
Total deferred rent
$
57

 
$
49

Total license fee payable
36

 
34

Long-term income tax liabilities
51

 
45

Long-term deferred income tax liabilities
5

 
50

Other
22

 
13

Total long-term obligations
171

 
191

Less current portion (included in other current liabilities)
(18
)
 
(19
)
Long-term obligations due after one year
$
153

 
$
172

Operating Lease Commitments
We describe our operating lease commitments in Note 9 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2015. In January 2016 we completed the purchase of certain leased facilities for $262 million in cash. The lease on these facilities was scheduled to expire in July 2017 and the remaining operating lease commitment was not significant. There were no other significant changes in our operating lease commitments during the first nine months of fiscal 2016.


7.
Income Taxes
Adoption of ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”
In the second quarter of fiscal 2016, we elected to early adopt ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” on a prospective basis. This new standard requires all deferred tax assets and liabilities, and any related valuation allowance, to be classified as noncurrent on the balance sheet. Prior periods were not adjusted.
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 December 2015 the Consolidated Appropriations Act, 2016 was signed into law. The Act includes a permanent reinstatement of the federal research and experimentation credit that was retroactive to January 1, 2015. We recorded a discrete tax benefit of approximately $12 million for the retroactive effect during the second quarter of fiscal 2016.
Our effective tax rates for the three and nine months ended April 30, 2016 were approximately 34% and 33% and did not differ significantly from the federal statutory rate of 35%. The tax benefit we received from the domestic production activities deduction and the federal research and experimentation credit were partially offset by the tax expense related to share-based compensation, state income taxes, and the effects of losses in certain jurisdictions where we do not recognize a tax benefit in both periods.
Our effective tax rates for the three and nine months ended April 30, 2015 were approximately 38% and 39%. Excluding discrete tax items primarily related to the goodwill impairment and the reinstatement of the federal research and experimentation credit, as well as including the effects of losses in certain jurisdictions where we do not recognize a tax benefit, our effective tax rate for those periods was approximately 36% and did not differ significantly from the federal statutory rate of 35%. Tax expense related to share-based compensation, state income taxes, and the effects of losses in certain jurisdictions where we do not recognize a tax benefit were partially offset by the benefit we received from the domestic production activities deduction and the federal research and experimentation credit in both periods.
Unrecognized Tax Benefits and Other Considerations
The total amount of our unrecognized tax benefits at July 31, 2015 was $56 million. Net of related deferred tax assets, unrecognized tax benefits were $37 million at that date. If we were to recognize these net benefits, our income tax expense would reflect a favorable net impact of $37 million. There were no material changes to these amounts during the nine months

17

ended April 30, 2016. 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 and Treasury Shares
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 24.1 million shares for $2.2 billion under these programs during the nine months ended April 30, 2016. We repurchased 13.7 million shares for $1.2 billion under these programs during the nine months ended April 30, 2015. At April 30, 2016, we had authorization from our Board of Directors to expend up to an additional $435 million for stock repurchases through May 19, 2019. 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.
Our treasury shares are repurchased at the market price on the trade date; accordingly, all amounts paid to reacquire these shares have been recorded as treasury stock on our balance sheets. 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.
In the past we have satisfied option exercises and restricted stock unit vesting under our employee equity incentive plans by reissuing treasury shares, and we may do so again in the future. During the second quarter of fiscal 2014 we began issuing new shares of common stock to satisfy option exercises and RSU vesting under our 2005 Equity Incentive Plan. We have not yet determined the ultimate disposition of the shares that we have repurchased in the past, and consequently we continue to hold them as treasury shares.
Dividends on Common Stock
During the nine months ended April 30, 2016 we declared and paid quarterly cash dividends that totaled $0.90 per share of outstanding common stock or $241 million. In May 2016 our Board of Directors declared a quarterly cash dividend of $0.30 per share of outstanding common stock payable on July 18, 2016 to stockholders of record at the close of business on July 12, 2016. 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.
Share-Based Compensation Expense
The following table summarizes the total share-based compensation expense that we recorded in operating income from continuing operations for the periods shown.
 
Three Months Ended
 
Nine Months Ended
(In millions, except per share amounts)
April 30,
2016
 
April 30,
2015
 
April 30,
2016
 
April 30,
2015
Cost of revenue
$
2

 
$
2

 
$
6

 
$
4

Selling and marketing
18

 
17

 
55

 
50

Research and development
21

 
19

 
63

 
56

General and administrative
24

 
21

 
73

 
62

Total share-based compensation expense
65

 
59

 
197

 
172

Income tax benefit
(20
)
 
(18
)
 
(60
)
 
(54
)
Decrease in net income from continuing operations
$
45

 
$
41

 
$
137

 
$
118

Decrease in net income per share:
 
 
 
 

 

Basic
$
0.18

 
$
0.15

 
$
0.52

 
$
0.42

Diluted
$
0.17

 
$
0.15

 
$
0.51

 
$
0.41

We capitalized $5 million in share-based compensation related to internal use software projects during the nine months ended April 30, 2016. The table above also excludes share-based compensation expense for our discontinued operations, which totaled $3 million during the nine months ended April 30, 2016 and $12 million during the nine months ended April 30, 2015.

18

Because we have not reclassified our statements of cash flows to segregate discontinued operations, these amounts are included in share-based compensation expense on our statements of cash flows for those periods.
Share-Based Awards Available for Grant
A summary of share-based awards available for grant under our 2005 Equity Incentive Plan for the nine months ended April 30, 2016 was as follows:
(Shares in thousands)
Shares
Available
for Grant
Balance at July 31, 2015
17,183

Options granted
(9
)
Restricted stock units granted (1)
(1,219
)
Share-based awards canceled/forfeited/expired (1)(2)
3,544

Balance at April 30, 2016
19,499

________________________________
(1)
RSUs granted from the pool of shares available for grant under our 2005 Equity Incentive Plan 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.
Stock Option Activity and Related Share-Based Compensation Expense
A summary of stock option activity for the nine months ended April 30, 2016 was as follows:
 
Options Outstanding
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Exercise
Price
Per Share
Balance at July 31, 2015
8,713

 
$
69.13

Granted
9

 
94.88

Exercised
(1,567
)
 
45.72

Canceled or expired
(328
)
 
75.18

Balance at April 30, 2016
6,827

 
$
74.24

 
 
 
 
Exercisable at April 30, 2016
3,802

 
$
58.37

At April 30, 2016, there was approximately $41 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 1.9 years.

19

Restricted Stock Unit Activity and Related Share-Based Compensation Expense
A summary of restricted stock unit activity for the nine months ended April 30, 2016 was as follows:
 
Restricted Stock Units
(Shares in thousands)
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Nonvested at July 31, 2015
8,916

 
$
76.64

Granted
530

 
96.36

Vested
(910
)
 
71.74

Forfeited
(1,463
)
 
72.77

Nonvested at April 30, 2016
7,073

 
$
79.55

At April 30, 2016, there was approximately $290 million of unrecognized compensation cost related to non-vested RSUs 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 1.8 years.


9.
Litigation
In fiscal 2015 Intuit was contacted by regulatory authorities, including Congress, the Federal Trade Commission, the SEC, the Department of Justice and certain state Attorneys General, which are conducting inquiries in connection with the increase during the 2015 tax season in attempts by criminals using stolen identity information to file fraudulent tax returns and claim refunds at the state and federal levels. Intuit is cooperating with all such government inquiries, including formal requests for information. In addition, we are the subject of certain actions, including a consolidated putative class action lawsuit by individuals who claim to have suffered damages in connection with the foregoing events. We believe that the allegations contained within these lawsuits are without merit, and we intend to vigorously defend against them.
Intuit is subject to certain routine legal proceedings, including class action lawsuits like those described above, as well as demands, claims, government inquiries 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 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 three reportable segments, described below, 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.
Small Business. Our Small Business segment includes the following offerings, which target small businesses and the accounting professionals who serve them.
•
QuickBooks financial and business management online services and desktop software; QuickBooks technical support; and financial supplies.
•
QuickBooks Accountant, QuickBooks Accountant Plus, and QuickBooks Online Accountant as well as the QuickBooks ProAdvisor Program, all of which are intended for the accounting professionals who serve small businesses.
•
Small business payroll products and services, including online payroll offerings such as QuickBooks Online Payroll and Intuit Online Payroll; desktop payroll offerings such as QuickBooks Basic Payroll and QuickBooks Enhanced Payroll; and full service payroll offerings such as QuickBooks Assisted Payroll and Intuit Full Service Payroll.

20

•
Payment processing services for small businesses, including merchant services such as credit and debit card processing; Web-based transaction processing services for online merchants; secure online payments for small businesses and their customers through the Intuit Commerce Network; GoPayment mobile payment processing services; and QuickBooks Point of Sale solutions.
Consumer Tax. Our Consumer Tax segment targets consumers and includes TurboTax income tax preparation products and services and electronic tax filing services.
Professional Tax. Our Professional Tax segment targets professional accountants in the U.S. and Canada and includes Lacerte, ProSeries, ProFile, and Intuit Tax Online professional tax preparation products and services, electronic tax filing services, bank product transmission services, and training services.
All of our segments 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, which 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, 2015 and in Note 1, "Description of Business and Summary of Significant Accounting Policies – Significant Accounting Policies" in this Quarterly Report on Form 10-Q. 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.
The following table shows our financial results by reportable segment for the periods indicated. Results for all periods presented have been adjusted to exclude results for our Demandforce, QuickBase, and Quicken businesses, which we classified as discontinued operations in the fourth quarter of fiscal 2015. See Note 4, “Discontinued Operations,” for more information.
 
Three Months Ended
 
Nine Months Ended
(In millions)
April 30,
2016
 
April 30,
2015
 
April 30,
2016
 
April 30,
2015
Net revenue:
 
 
 
 
 
 
 
Small Business segment
$
580

 
$
516

 
$
1,690

 
$
1,560

Consumer Tax segment
1,598

 
1,489

 
1,930

 
1,759

Professional Tax segment
126

 
130

 
320

 
177

Total net revenue
$
2,304

 
$
2,135

 
$
3,940

 
$
3,496

 
 
 
 
 
 
 
 
Operating income from continuing operations:
 
 
 
 
 
 
 
Small Business segment
$
217

 
$
166

 
$
627

 
$
524

Consumer Tax segment
1,293

 
1,188

 
1,327

 
1,178

Professional Tax segment
86

 
83

 
199

 
43

Total segment operating income
1,596

 
1,437

 
2,153

 
1,745

Unallocated corporate items:
 
 
 
 
 
 
 
Share-based compensation expense
(65
)
 
(59
)
 
(197
)
 
(172
)
Other common expenses
(238
)
 
(187
)
 
(635
)
 
(560
)
Amortization of acquired technology
(5
)
 
(8
)
 
(17
)
 
(22
)
Amortization of other acquired intangible assets
(3
)
 
(3
)
 
(6
)
 
(9
)
Goodwill impairment charge
—

 
(114
)
 
—

 
(114
)
Total unallocated corporate items
(311
)
 
(371
)
 
(855
)
 
(877
)
Total operating income from continuing operations
$
1,285

 
$
1,066

 
$
1,298

 
$
868




21

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 Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended July 31, 2015. In the third quarter of fiscal 2016 we completed the sales of our Demandforce, QuickBase, and Quicken businesses. We have reclassified our statements of operations for all periods presented to reflect these businesses as discontinued operations. We have also segregated the net assets of these businesses from continuing operations on our balance sheet at July 31, 2015. Because the cash flows of these discontinued operations were not material for any period presented, we have not segregated them on our statements of cash flows. 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 creates business and financial management solutions that help simplify the business of life for small businesses, consumers, and accounting professionals. We organize our businesses into three reportable segments – Small Business, Consumer Tax, and Professional Tax.

Small Business: This segment targets small businesses and the accounting professionals who serve them and includes QuickBooks financial and business management online services and desktop software, payroll solutions, and payment processing solutions.

Consumer Tax: This segment targets consumers and includes TurboTax income tax preparation products and services.

Professional Tax: This segment targets professional accountants in the U.S. and Canada and includes Lacerte, ProSeries, ProFile, and Intuit Tax Online professional tax products and services.
Our Growth Strategy
Based on our assessment of key technology and demographic trends – an increasingly borderless world, the prevalence of mobile devices, and the scalability of the cloud – we see significant opportunities to drive future growth by continuing to solve the unmet needs of small businesses, consumers, and accounting professionals. Our evolving growth strategy includes three key elements:

•
Focus on the product – we call it “Delivering awesome product experiences.” Computing devices are moving to the palm of our hands in the form of tablets and smart phones. Our TurboTax solutions, for example, let customers prepare

22

and file their entire tax returns online, via tablet, mobile phone, or desktop computer. We also believe that a key factor in growing our customer base is delivering an amazing first-use experience so our customers can get the value they expect from our offerings as quickly and easily 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 allows small business customers all over the world to localize, configure, and add value to the offering.

•
Leveraging our data for our customers' benefit – we call it “Using data to create delight.” Our customers generate 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
Industry Trends
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. Competitive interest and expertise in many of the markets we serve have grown markedly 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.
Seasonality
Our Consumer Tax offerings have significant seasonal patterns. As a result, during each of the last three fiscal years the total revenue for our third quarter ended April 30 has represented nearly half of our total revenue for those years. We expect the seasonality of our Consumer Tax business to continue to have a significant impact on our quarterly financial results in the future.
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.
Beginning in early calendar year 2015, state taxing authorities, the IRS, and the tax preparation industry experienced an increase in attempts by criminals using stolen identity information to file fraudulent tax returns and claim refunds at the federal level and expanding into the state level. We implemented additional security measures in our products and began working with state governments to share information regarding suspicious filings while continuing to share such information with the federal government. We continue to invest in security and to work with the broader industry and government to protect our customers against this type of fraud.
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 Quarterly Report.

23

Overview of Financial Results
The most important financial indicators that we use to assess our business are revenue growth for the company as a whole, for each reportable segment, and for product lines within each reportable segment; operating income growth and operating income margins for the company as a whole and for each reportable segment; 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 segment results below. These non-financial drivers include, for example, customer growth and retention for all of our businesses and transaction volume for our payment processing business. Total credit and debit card transaction volume correlates strongly with the macroeconomic environment and is one of the key drivers of revenue growth in our payment processing business. Customers for our connected services offerings have generally grown faster than those for our traditional desktop software offerings, reflecting our strategic focus on connected services over the past few years. Connected services (total service and other revenue) generated $3.0 billion or 73% of our total revenue in fiscal 2015, compared with about 50% of our total revenue seven years ago. We expect connected services revenue as a percentage of our total revenue to continue to grow in the future.
Total net revenue for the first nine months of fiscal 2016 was $3.9 billion, an increase of 13% compared with the same period of fiscal 2015. Revenue in our Consumer Tax segment grew 10% in the first nine months of fiscal 2016 compared with the same period a year ago due to 15% growth in TurboTax Online federal units. Total net revenue growth was also affected by the changes that we made to our desktop software offerings in fiscal 2015. In fiscal 2015 we began delivering ongoing enhancements and certain connected services for our Professional Tax desktop software products and we plan to continue to provide them for all future versions of those products. Due to these changes, we recognize revenue for these offerings as services are provided through the end of each calendar year. Prior to these changes, we recognized a substantial portion of the revenue for these offerings during our third fiscal quarters ended April 30. As a result, revenue in our Professional Tax segment increased 81% to $320 million in the first nine months of fiscal 2016 compared with the same period of fiscal 2015. Starting with the release of QuickBooks 2015 in the first quarter of fiscal 2015, and for all subsequent versions, we began delivering ongoing enhancements and certain connected services for our QuickBooks desktop software products. We plan to continue to provide ongoing enhancements and certain connected services for all future versions of these products. As a result of these changes, we recognize revenue for these QuickBooks desktop software products as services are provided over approximately three years. Revenue in our Small Business segment grew 8% in the first nine months of fiscal 2016 compared with the same period of fiscal 2015 due to growth in QuickBooks Online and online payroll services and the impact of the changes to our QuickBooks desktop software products.
Operating income from continuing operations for the first nine months of fiscal 2016 increased 50% compared with the same period of fiscal 2015 primarily due to the increase in revenue described above. Higher revenue was partially offset by higher costs and expenses, including higher spending for staffing, advertising and other marketing programs, and share-based compensation. We also recorded a $114 million charge to operating expense for the impairment of goodwill in our Consumer Ecosystem reporting unit in the third quarter of fiscal 2015.
Net income from continuing operations for the first nine months of fiscal 2016 increased 64% compared with the same period of fiscal 2015 due to the increase in operating income and a lower effective tax rate in the fiscal 2016 period. Diluted net income per share from continuing operations for the first nine months of fiscal 2016 increased 77% to $3.17 as a result of the increase in net income and the decline in weighted average diluted common shares compared with the same period of fiscal 2015.
We ended the first nine months of fiscal 2016 with cash, cash equivalents and investments totaling $1.6 billion. During the first nine months of fiscal 2016 we generated cash from operations, net sales of investments, net borrowings under our revolving credit facilities, proceeds from our term loan, the sales of our Demandforce, QuickBase, and Quicken businesses, and the issuance of common stock under employee stock plans. During the same period we used cash for the repurchase of shares of our common stock under our stock repurchase programs, the payment of cash dividends, and capital expenditures, including the purchase of certain previously leased facilities. At April 30, 2016, we had authorization from our Board of Directors to expend up to an additional $435 million for stock repurchases through May 19, 2019.


24

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, 2015 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 nine months of fiscal 2016. 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)
Q3
FY16
 
Q3
FY15
 
$
Change
 
%
Change
 
YTD
Q3
FY16
 
YTD
Q3
FY15
 
$
Change
 
%
Change
Total net revenue
$
2,304

 
$
2,135

 
$
169

 
8
%
 
$
3,940

 
$
3,496

 
$
444

 
13
%
Operating income from continuing operations
1,285

 
1,066

 
219

 
21
%
 
1,298

 
868

 
430

 
50
%
Net income from continuing operations
848

 
656

 
192

 
29
%
 
846