10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 19, 2020
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-Q
| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||||||
For the quarterly period ended October 31, 2020
OR
| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||||||||
| For the transition period from ____________ to ____________ . | ||||||||
Commission File Number 0-21180
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||
(Address of principal executive offices, including zip code)
(650 ) 944-6000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | |||||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company |
Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 262,740,511 shares of Common Stock, $0.01 par value, were outstanding at November 13, 2020.
| INTUIT INC. FORM 10-Q INDEX | ||
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Intuit, the Intuit logo, QuickBooks, TurboTax, Mint, Lacerte, ProSeries, and Intuit ProConnect, among others, are registered trademarks and/or registered service marks of Intuit Inc., or one of its subsidiaries, in the United States and other countries. Other parties’ marks are the property of their respective owners.
Intuit Q1 Fiscal 2021 Form 10-Q
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. These risks and uncertainties may be amplified by the coronavirus (“COVID-19”) pandemic, which has caused significant global economic instability and uncertainty. The extent to which the COVID-19 pandemic impacts Intuit’s business, operations, financial results, and financial condition, including the duration and magnitude of such effects, will depend on numerous evolving factors, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or respond to its impact, and how quickly and to what extent normal economic and operating conditions can resume. Please also see the section entitled "Risk Factors" in Item 1A of Part II of this Report for important information to consider when evaluating these statements. All statements in this report, other than statements that are purely historical, are forward-looking statements. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “forecast,” “estimate,” “seek,” and similar expressions also identify forward-looking statements. In this report, forward-looking statements include, without limitation, the following:
•our expectations and beliefs regarding future conduct and growth of the business;
•statements regarding the impact of the COVID-19 pandemic on our business;
•our beliefs and expectations regarding seasonality, competition and other trends that affect our business;
•our expectation that we will continue to invest significant resources in our product development, marketing and sales capabilities;
•our expectation that we will continue to invest significant management attention and resources in our information technology infrastructure and in our privacy and security capabilities;
•our expectation that we will work with the broader industry and government to protect our customers from fraud;
•our expectation that we will generate significant cash from operations;
•our expectation that total service and other revenue as a percentage of our total revenue will continue to grow;
•our expectations regarding the development of future products, services, business models and technology platforms and our research and development efforts;
•our assumptions underlying our critical accounting policies and estimates, including our judgments and estimates regarding revenue recognition; stock volatility and other assumptions used to estimate the fair value of share-based compensation; the fair value of goodwill; and expected future amortization of acquired intangible assets;
•our intention not to sell our investments and our belief that it is more likely than not that we will not be required to sell them before recovery at par;
•our belief that the investments we hold are not other-than-temporarily impaired;
•our belief that we take prudent measures to mitigate investment related risks;
•our belief that our exposure to currency exchange fluctuation risk will not be significant in the future;
•our assessments and estimates that determine our effective tax rate;
•our belief that it is not reasonably possible that there will be a significant increase or decrease in our unrecognized tax benefits over the next 12 months;
•our belief that our cash and cash equivalents, investments and cash generated from operations will be sufficient to meet our seasonal working capital needs, capital expenditure requirements, contractual obligations (including the pending acquisition of Credit Karma, Inc. ("Credit Karma")), debt service requirements and other liquidity requirements associated with our operations for at least the next 12 months;
•our expectation that we will return excess cash generated by operations to our stockholders through repurchases of our common stock and the payment of cash dividends, after taking into account our operating and strategic cash needs;
•our judgments and assumptions relating to our loan portfolio;
•our belief that the credit facilities will be available to us should we choose to borrow under them;
•our assessments and beliefs regarding the future developments and outcomes of pending legal proceedings and inquiries by regulatory authorities, the liability, if any, that Intuit may incur as a result of those proceedings and inquiries, and the impact of any potential losses or expenses associated with such proceedings or inquiries on our financial statements; and
•our expectations and beliefs regarding the pending acquisition of Credit Karma.
We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. We encourage you to read carefully all information provided in this Quarterly Report and in our other filings with the Securities and Exchange Commission before deciding to invest in our stock or to maintain or change your investment. These forward-looking statements are based on information as of the filing date of this Quarterly Report, and we undertake no obligation to revise or update any forward-looking statement for any reason.
Intuit Q1 Fiscal 2021 Form 10-Q
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| PART I - FINANCIAL INFORMATION | ||
| ITEM 1 - FINANCIAL STATEMENTS | ||
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
| |||||||||||
| Three Months Ended | |||||||||||
| (In millions, except per share amounts) | October 31, 2020 | October 31, 2019 | |||||||||
| Net revenue: | |||||||||||
| Product | $ | $ | |||||||||
| Service and other | |||||||||||
| Total net revenue | |||||||||||
| Costs and expenses: | |||||||||||
| Cost of revenue: | |||||||||||
| Cost of product revenue | |||||||||||
| Cost of service and other revenue | |||||||||||
| Amortization of acquired technology | |||||||||||
| Selling and marketing | |||||||||||
| Research and development | |||||||||||
| General and administrative | |||||||||||
| Amortization of other acquired intangible assets | |||||||||||
| Total costs and expenses | |||||||||||
| Operating income | |||||||||||
| Interest expense | ( |
( |
|||||||||
| Interest and other income, net | |||||||||||
| Income before income taxes | |||||||||||
| Income tax provision (benefit) | ( |
||||||||||
| Net income | $ | $ | |||||||||
| Basic net income per share | $ | $ | |||||||||
| Shares used in basic per share calculations | |||||||||||
| Diluted net income per share | $ | $ | |||||||||
| Shares used in diluted per share calculations | |||||||||||
| Cash dividends declared per common share | $ | $ | |||||||||
See accompanying notes.
Intuit Q1 Fiscal 2021 Form 10-Q
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
| |||||||||||
| Three Months Ended | |||||||||||
| (In millions) | October 31, 2020 | October 31, 2019 | |||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss), net of income taxes: | |||||||||||
| Unrealized gain (loss) on available-for-sale debt securities | ( |
||||||||||
| Foreign currency translation loss | ( |
||||||||||
| Total other comprehensive income (loss), net | ( |
||||||||||
| Comprehensive income | $ | $ | |||||||||
See accompanying notes.
Intuit Q1 Fiscal 2021 Form 10-Q
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INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
| |||||||||||
| (In millions) | October 31, 2020 | July 31, 2020 |
|||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Investments | |||||||||||
| Accounts receivable, net | |||||||||||
| Income taxes receivable | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Current assets before funds held for customers | |||||||||||
| Funds held for customers | |||||||||||
| Total current assets | |||||||||||
| Long-term investments | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Acquired intangible assets, net | |||||||||||
| Long-term deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued compensation and related liabilities | |||||||||||
| Deferred revenue | |||||||||||
| Other current liabilities | |||||||||||
| Current liabilities before customer fund deposits | |||||||||||
| Customer fund deposits | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Operating lease liabilities | |||||||||||
| Other long-term obligations | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
| Preferred stock | |||||||||||
| Common stock and additional paid-in capital | |||||||||||
| Treasury stock, at cost | ( |
( |
|||||||||
| Accumulated other comprehensive loss | ( |
( |
|||||||||
| Retained earnings | |||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See accompanying notes
Intuit Q1 Fiscal 2021 Form 10-Q
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
| |||||||||||||||||||||||||||||||||||
| Three Months Ended October 31, 2020 | |||||||||||||||||||||||||||||||||||
| (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, 2020 |
|
$ |
|
$ | ( |
$ | ( |
$ |
|
$ |
|
||||||||||||||||||||||||
| Comprehensive income | — | — | — | ( |
|||||||||||||||||||||||||||||||
| Issuance of stock under employee stock plans, net of shares withheld for employee taxes | ( |
— | — | ( |
|||||||||||||||||||||||||||||||
| Stock repurchases under stock repurchase programs | — | — | — | ||||||||||||||||||||||||||||||||
Dividends and dividend rights declared ($ |
— | — | — | — | ( |
( |
|||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at October 31, 2020 |
|
$ |
|
$ | ( |
$ | ( |
$ |
|
$ |
|
||||||||||||||||||||||||
| Three Months Ended October 31, 2019 | |||||||||||||||||||||||||||||||||||
| (In millions, except shares in thousands) | Shares of Common Stock |
Common Stock and Additional Paid-In Capital |
Treasury Stock |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Total Stockholders' Equity |
|||||||||||||||||||||||||||||
| Balance at July 31, 2019 |
|
$ |
|
$ | ( |
$ | ( |
$ |
|
$ |
|
||||||||||||||||||||||||
| Comprehensive income | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of stock under employee stock plans, net of shares withheld for employee taxes | ( |
— | — | ( |
|||||||||||||||||||||||||||||||
| Stock repurchases under stock repurchase programs | ( |
— | ( |
— | — | ( |
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Dividends and dividend rights declared ($ |
— | — | — | — | ( |
( |
|||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance at October 31, 2019 |
|
$ |
|
$ | ( |
$ | ( |
$ |
|
$ |
|
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See accompanying notes.
Intuit Q1 Fiscal 2021 Form 10-Q
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INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| |||||||||||
| Three Months Ended | |||||||||||
| (In millions) | October 31, 2020 | October 31, 2019 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization of acquired intangible assets | |||||||||||
| Non-cash operating lease cost | |||||||||||
| Share-based compensation expense | |||||||||||
| Deferred income taxes | ( |
||||||||||
| Other | ( |
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| Total adjustments |
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| Originations of loans held for sale | ( |
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| Sale and principal payments of loans held for sale | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( |
||||||||||
| Income taxes receivable | ( |
( |
|||||||||
| Prepaid expenses and other assets | ( |
( |
|||||||||
| Accounts payable | ( |
( |
|||||||||
| Accrued compensation and related liabilities | ( |
( |
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| Deferred revenue | ( |
( |
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| Operating lease liabilities | ( |
( |
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| Other liabilities | ( |
||||||||||
| Total changes in operating assets and liabilities | ( |
( |
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| Net cash provided by (used in) operating activities |
|
( |
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| Cash flows from investing activities: | |||||||||||
| Purchases of corporate and customer fund investments | ( |
( |
|||||||||
| Sales of corporate and customer fund investments | |||||||||||
| Maturities of corporate and customer fund investments | |||||||||||
| Purchases of property and equipment | ( |
( |
|||||||||
| Acquisitions of businesses, net of cash acquired | ( |
||||||||||
| Originations of term loans to small businesses | ( |
( |
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| Principal repayments of term loans from small businesses | |||||||||||
| Other | ( |
( |
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| Net cash used in investing activities | ( |
( |
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| Cash flows from financing activities: | |||||||||||
| Repayments on borrowings under unsecured revolving credit facility | ( |
||||||||||
| Repayment of debt | ( |
( |
|||||||||
| Proceeds from issuance of stock under employee stock plans | |||||||||||
| Payments for employee taxes withheld upon vesting of restricted stock units | ( |
( |
|||||||||
| Cash paid for purchases of treasury stock | ( |
||||||||||
| Dividends and dividend rights paid | ( |
( |
|||||||||
| Net change in customer fund deposits | ( |
||||||||||
| Net cash used in financing activities | ( |
( |
|||||||||
| Effect of exchange rates on cash, cash equivalents, restricted cash, and restricted cash equivalents | ( |
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Intuit Q1 Fiscal 2021 Form 10-Q
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| Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents | ( |
( |
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| Cash, cash equivalents, restricted cash, and restricted cash equivalents at beginning of period | |||||||||||
| Cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | $ |
|
$ |
|
|||||||
| Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents reported within the condensed consolidated balance sheets to the total amounts reported on the condensed consolidated statements of cash flows | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash and restricted cash equivalents included in funds held for customers | |||||||||||
| Total cash, cash equivalents, restricted cash, and restricted cash equivalents at end of period | $ |
|
$ |
|
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See accompanying notes.
Intuit Q1 Fiscal 2021 Form 10-Q
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INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
| ||
| 1. Description of Business and Summary of Significant Accounting Policies | ||
Description of Business | ||
Intuit helps consumers, small businesses, and the self-employed prosper by delivering financial management and compliance products and services. We also provide specialized tax products to accounting professionals, who are key partners that help us serve small business customers.
Our flagship brands, QuickBooks, TurboTax and Mint, help customers run their small businesses, pay employees and send invoices, separate business and personal expenses, track their money, and file income taxes. ProSeries and Lacerte are our leading tax preparation offerings for professional accountants. Incorporated in 1984 and headquartered in Mountain View, California, we sell our products and services primarily in the United States.
Basis of Presentation | ||
These condensed consolidated financial statements include the financial statements of Intuit and its wholly owned subsidiaries. We have eliminated all significant intercompany balances and transactions in consolidation. We have included all adjustments, consisting only of normal recurring items, which we considered necessary for a fair presentation of our financial results for the interim periods presented. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to reportable segments. In August 2020, we reorganized certain technology and customer success functions that support and benefit our overall platform. Additionally, certain legal, facility and employee service costs are now managed at the corporate level. As a result, these costs are no longer included in segment operating income and are now included in other common expenses. For the three months ended October 31, 2019, we reclassified $43 25 3
These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2020. Results for the three months ended October 31, 2020 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2021 or any other future period.
Seasonality | ||
Our Consumer and ProConnect offerings have a significant and distinct seasonal pattern as sales and revenue from our income tax preparation products and services are heavily concentrated in the period from November through April. This seasonal pattern results in higher net revenues during our second and third quarters ending January 31 and April 30, respectively. During fiscal 2020, as a relief measure in response to the COVID-19 pandemic, the Internal Revenue Service extended the filing deadline for the 2019 tax year from April 15, 2020 to July 15, 2020. Additionally, all states with a personal income tax also extended their due dates, predominantly to July. As a result, there was a shift in sales and revenue from our third fiscal quarter to our fourth fiscal quarter during fiscal 2020.
Significant Accounting Policies | ||
We describe our significant accounting policies in Note 1 to the financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2020. There have been no changes to our significant accounting policies during the first three months of fiscal 2021, other than the adoption of accounting pronouncements as described below in "Accounting Standards Recently Adopted."
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Use of Estimates | ||
In preparing our condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP), we make certain judgments, estimates, and assumptions that affect the amounts reported in our financial statements and the disclosures made in the accompanying notes. For example, we use judgments and estimates in determining how revenue should be recognized. These judgments and estimates include identifying performance obligations, determining if the performance obligations are distinct, determining the standalone sales price (SSP) and timing of revenue recognition for each distinct performance obligation, and estimating variable consideration to be included in the transaction price. We use estimates in determining the collectibility of accounts receivable and notes receivable, the appropriate levels of various accruals including accruals for litigation contingencies, the discount rate used to calculate lease liabilities, the amount of our worldwide tax provision, the realizability of deferred tax assets, and the credit losses of available-for-sale debt securities. 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. Additionally, in the context of the ongoing global COVID-19 pandemic, while there has been no material impact on our estimates to date, in future periods, facts and circumstances could change and impact our estimates.
Computation of Net Income (Loss) Per Share | ||
We compute basic net income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the shares issuable upon the exercise of stock options and upon the vesting of restricted stock units (RSUs) under the treasury stock method.
We include stock options with combined exercise prices and unrecognized compensation expense that are less than the average market price for our common stock, and RSUs with unrecognized compensation expense that is less than the average market price for our common stock, in the calculation of diluted net income per share. We exclude stock options with combined exercise prices and unrecognized compensation expense that are greater than the average market price for our common stock, and RSUs with unrecognized compensation expense that is greater than the average market price for our common stock, from the calculation of diluted net income per share because their effect is anti-dilutive. Under the treasury stock method, the amount that must be paid to exercise stock options and the amount of compensation expense for future service that we have not yet recognized for stock options and RSUs are assumed to be used to repurchase shares.
All of the RSUs we grant have dividend rights. Dividend rights are accumulated and paid when the underlying RSUs vest. Since the dividend rights are subject to the same vesting requirements as the underlying equity awards they are considered a contingent transfer of value. Consequently, the RSUs are not considered participating securities and we do not present them separately in earnings per share.
In loss periods, basic net loss per share and diluted net loss per share are the same since the effect of potential common shares is anti-dilutive and therefore excluded.
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The following table presents the composition of shares used in the computation of basic and diluted net income per share for the periods indicated.
| Three Months Ended | |||||||||||
| (In millions, except per share amounts) | October 31, 2020 | October 31, 2019 | |||||||||
| Numerator: | |||||||||||
| Net income | $ | $ | |||||||||
| Denominator: | |||||||||||
| Shares used in basic per share amounts: | |||||||||||
| Weighted average common shares outstanding | |||||||||||
| Shares used in diluted per share amounts: | |||||||||||
| Weighted average common shares outstanding | |||||||||||
| Dilutive common equivalent shares from stock options | |||||||||||
| and restricted stock awards | |||||||||||
| Dilutive weighted average common shares outstanding | |||||||||||
| Basic and diluted net income per share: | |||||||||||
| Basic net income per share | $ | $ | |||||||||
| Diluted net income per share | $ | $ | |||||||||
| Shares excluded from diluted net income per share: | |||||||||||
| Weighted average stock options and restricted stock units that have been excluded from dilutive common equivalent shares outstanding due to their anti-dilutive effect | |||||||||||
Deferred Revenue | ||
Generally, we receive payment at the time we enter into a contract with a customer. We record deferred revenue when we have entered into a contract with a customer and cash payments are received or due prior to transfer of control or satisfaction of the related performance obligation. During the three months ended October 31, 2020, we recognized revenue of $399 million that was included in deferred revenue at July 31, 2020. During the three months ended October 31, 2019, we recognized revenue of $355 million that was included in deferred revenue at July 31, 2019.
Our performance obligations are generally satisfied within 12 months of the initial contract date. As of October 31, 2020 and July 31, 2020, the deferred revenue balance related to performance obligations that will be satisfied after 12 months was $9 million and $13 million, respectively, and is included in other long-term obligations on our condensed consolidated balance sheets.
Notes Receivable and Allowances for Loan Losses | ||
Notes receivable held for investment consist of term loans to small businesses and are included in prepaid expenses and other current assets on our condensed consolidated balance sheets. As of October 31, 2020 and July 31, 2020, the notes receivable balance was $26 million and $40 million, respectively, and the allowances for loan losses were not material. The term loans are not secured and are recorded at amortized cost, net of allowances for loan losses. We maintain an allowance for loan losses to reserve for potentially uncollectible notes receivable. We evaluate the creditworthiness of our loan portfolio on a pooled basis due to its composition of small, homogeneous loans with similar general credit risk and characteristics and apply a loss rate at the time of loan origination. The loss rate and underlying model are updated periodically to reflect actual loan performance and changes in assumptions. We make judgments about the known and inherent risks in the loan portfolio, adverse situations that may affect borrowers’ ability to repay and current economic conditions. When we determine that amounts are uncollectible, we write them off against the allowance.
Paycheck Protection Program - In April 2020, Intuit was approved as a non-bank Small Business Administration lender for the Paycheck Protection Program (PPP). The PPP was authorized under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide small businesses loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt which is designed to provide assistance to small businesses during the COVID-19 pandemic. Lending under the program expired on August 8, 2020. All of the loans held for sale under this program have been sold. When loans under this program do not qualify to be sold, they are held for investment. As of October 31, 2020 and July 31, 2020, PPP loans held for investment were not material and are included in prepaid expenses and other current assets and other assets on our condensed consolidated balance sheets.
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Concentration of Credit Risk and Significant Customers | ||
No customer accounted for 10% or more of total net revenue in the three months ended October 31, 2020 or October 31, 2019. No customer accounted for 10% or more of gross accounts receivable at October 31, 2020 or July 31, 2020.
Accounting Standards Recently Adopted | ||
Internal-Use Software - In August 2018 the FASB issued Accounting Standards Update (ASU) 2018-15, “Intangibles—Goodwill and Other (Topic 350): Internal-Use Software.” This standard aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this standard in the first quarter of our fiscal year beginning August 1, 2020 on a prospective basis. The adoption did not have a material impact on our condensed consolidated financial statements.
Goodwill Impairment - In January 2017 the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This standard eliminates Step 2 from the goodwill impairment test. Instead, an entity should compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. We adopted this standard in the first quarter of our fiscal year beginning August 1, 2020 on a prospective basis and will apply the guidance during our annual goodwill impairment test for the year ending July 31, 2021. The adoption did not have a material impact on our condensed consolidated financial statements.
| 2. Fair Value Measurements | ||
Fair Value Hierarchy | ||
The authoritative guidance defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, we consider the principal or most advantageous market for an asset or liability and assumptions that market participants would use when pricing the asset or liability. In addition, we consider and use all valuation methods that are appropriate in estimating the fair value of an asset or liability.
The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In general, the authoritative guidance requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by the authoritative guidance are as follows:
•Level 1 uses unadjusted quoted prices that are available in active markets for identical assets or liabilities.
•Level 2 uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data for substantially the full term of the assets or liabilities.
•Level 3 uses one or more unobservable inputs that are supported by little or no market activity and that are significant to the determination of fair value. Level 3 assets and liabilities include those whose fair values are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis | ||
The following table summarizes financial assets and financial liabilities that we measured at fair value on a recurring basis at the dates indicated, classified in accordance with the fair value hierarchy described above.
| October 31, 2020 | July 31, 2020 | ||||||||||||||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Total Fair Value |
Level 1 | Level 2 | Total Fair Value |
|||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||
| Cash equivalents, primarily money market funds and time deposits | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Available-for-sale debt securities: | |||||||||||||||||||||||||||||||||||
| Municipal bonds | |||||||||||||||||||||||||||||||||||
| Corporate notes | |||||||||||||||||||||||||||||||||||
| U.S. agency securities | |||||||||||||||||||||||||||||||||||
| Total available-for-sale debt securities | |||||||||||||||||||||||||||||||||||
| Total assets measured at fair value on a recurring basis | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||
Senior unsecured notes(1)
|
$ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(1) Carrying value on our balance sheets at each October 31, 2020 and July 31, 2020 was $1.98
The following table summarizes our cash equivalents and available-for-sale debt securities by balance sheet classification and level in the fair value hierarchy at the dates indicated.
| October 31, 2020 | July 31, 2020 | ||||||||||||||||||||||||||||||||||
| (In millions) | Level 1 | Level 2 | Total Fair Value |
Level 1 | Level 2 | Total Fair Value |
|||||||||||||||||||||||||||||
| Cash equivalents: | |||||||||||||||||||||||||||||||||||
| In cash and cash equivalents | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Available-for-sale debt securities: | |||||||||||||||||||||||||||||||||||
| In investments | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| In funds held for customers | |||||||||||||||||||||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
We value our Level 1 assets, consisting primarily of money market funds and time deposits 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 assets whose fair values we measure using Level 3 inputs consist of loans held for sale.
These loans are recorded at the lower of cost or fair value and totaled $98 million at July 31, 2020. The difference between
cost and fair value on that date was not material. We had no loans held for sale at October 31, 2020.
Financial liabilities whose fair values we measure using Level 2 inputs consist of senior unsecured notes. See Note 6, “Long-Term Obligations and Commitments” for more information. We measure the fair value of our senior unsecured notes based on their trading prices and the interest rates we could obtain for other borrowings with similar terms.
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended October 31, 2020.
| 3. Cash and Cash Equivalents, Investments, and Funds Held for Customers | ||
We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. In all periods presented, cash equivalents consist primarily of money market funds and time deposits. Investments consist primarily of investment-grade available-for-sale debt securities. Funds held for customers represent cash held on behalf of our customers that is invested in cash and cash equivalents and investment-grade available-for-sale securities, restricted for use
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solely for the purpose of satisfying amounts we owe on behalf of our customers. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market funds, we diversify our investments in debt securities by limiting our holdings with any individual issuer.
The following table summarizes our cash and cash equivalents, investments, and funds held for customers by balance sheet classification at the dates indicated.
| October 31, 2020 | July 31, 2020 | ||||||||||||||||||||||
| (In millions) | Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | |||||||||||||||||||
| Classification on condensed consolidated balance sheets: | |||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Investments | |||||||||||||||||||||||
| Funds held for customers | |||||||||||||||||||||||
| Total cash and cash equivalents, investments, and funds held for customers |
$ | $ | $ | $ | |||||||||||||||||||
The following table summarizes our cash and cash equivalents, investments, and funds held for customers by investment category at the dates indicated.
| October 31, 2020 | July 31, 2020 | ||||||||||||||||||||||
| (In millions) | Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | |||||||||||||||||||
| Type of issue: | |||||||||||||||||||||||
| Total cash, cash equivalents, restricted cash, and restricted cash equivalents |
$ | $ | $ | $ | |||||||||||||||||||
| Available-for-sale debt securities: | |||||||||||||||||||||||
| Municipal bonds | |||||||||||||||||||||||
| Corporate notes | |||||||||||||||||||||||
| U.S. agency securities | |||||||||||||||||||||||
| Total available-for-sale debt securities | |||||||||||||||||||||||
| Total cash, cash equivalents, restricted cash, restricted cash equivalents, and investments | $ | $ | $ | $ | |||||||||||||||||||
We use the specific identification method to compute gains and losses on investments. We include realized gains and losses on our available-for-sale debt securities in interest and other income on our condensed consolidated statements of operations. Gross realized gains and losses on our available-for-sale debt securities for the three months ended October 31, 2020 and October 31, 2019 were no t significant.
We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in accumulated other comprehensive income or loss in the stockholders’ equity section of our condensed consolidated balance sheets, except for certain unrealized losses described below. Gross unrealized gains and losses on our available-for-sale debt securities at October 31, 2020 and July 31, 2020 were no
For available-for sale debt securities in an unrealized loss position, we determine whether a credit loss exists. The estimate of the credit loss is determined by considering available information relevant to the collectibility of the security and information about past events, current conditions, and reasonable and supportable forecasts. The allowance for credit loss is recorded to interest and other income on our condensed consolidated statement of operations, not to exceed the amount of the unrealized loss. Any excess unrealized loss greater than the credit loss at a security level is recognized in accumulated other comprehensive income or loss in the stockholders' equity section of our condensed consolidated balance sheets. We determined there were no credit losses related to available-for-sale securities as of October 31, 2020. Unrealized losses on available-for-sale debt securities at October 31, 2020 were not significant. 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 of the amortized cost basis, which may be at maturity.
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The following table summarizes our available-for-sale debt securities, included in investments and funds held for customers, classified by the stated maturity date of the security at the dates indicated.
| October 31, 2020 | July 31, 2020 | ||||||||||||||||||||||
| (In millions) | Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | |||||||||||||||||||
| Due within one year | $ | $ | $ | $ | |||||||||||||||||||
| Due within two years | |||||||||||||||||||||||
| Due within three years | |||||||||||||||||||||||
| Due after three years | |||||||||||||||||||||||
| Total available-for-sale debt securities | $ | $ | $ | $ | |||||||||||||||||||
Long-term investments represent non-marketable equity securities in privately held companies that do not have a readily determinable fair value. These investments are accounted for under the measurement alternative whereby we adjust the carrying value of these investments based on observable price changes from orderly transactions for identical or similar investments of the same issuer. As of October 31, 2020 and July 31, 2020, the carrying value of long-term investments was $28 million and $19 million, respectively, and adjustments to the carrying value of these investments for the three months ended October 31, 2020 were not significant.
The following table summarizes our funds held for customers by investment category at the dates indicated.
| October 31, 2020 | July 31, 2020 | ||||||||||
| (In millions) | |||||||||||
| Restricted cash and restricted cash equivalents | $ | $ | |||||||||
| Restricted available-for-sale debt securities | |||||||||||
| Total funds held for customers | $ | $ | |||||||||
| October 31, 2019 | July 31, 2019 | ||||||||||
| (In millions) | |||||||||||
| Restricted cash and restricted cash equivalents | $ | $ | |||||||||
| Restricted available-for-sale debt securities | |||||||||||
| Total funds held for customers | $ | $ | |||||||||
| 4. Business Combinations | ||
Credit Karma | ||
On February 24, 2020, we entered into an agreement and plan of merger (the Merger Agreement) to acquire Credit Karma, Inc., (Credit Karma) for $7.1 billion, subject to certain customary adjustments set forth in the Merger Agreement. We are acquiring Credit Karma to expand our consumer finance platform, accelerate our mission of powering prosperity around the world, and help consumers unlock smart money decisions to help make ends meet.
The purchase price for Credit Karma will be payable in equal portions of cash and Intuit common stock, with the shares being valued at $299.7306 per share (which price was calculated based on the daily volume-weighted average sales price per share for Intuit common stock for the ten trading days ending on February 21, 2020). The per share price of these shares has been fixed as of the Merger Agreement signing date. The aggregate value of these shares will fluctuate based on changes in our share price between the signing date and the closing date.
The total consideration of $7.1 billion includes an estimated $1.0 billion for the fair value of equity awards that will be expensed over service periods of up to three years . Additionally, as part of the merger agreement, following the close of the transaction we have agreed to issue to the employees of Credit Karma approximately $300 million of restricted stock units, which will be charged to expense over a service period of four years . The cash portion of the purchase price is expected to be financed with our existing cash.
The Merger Agreement must be approved by Credit Karma shareholders and is subject to receipt of required regulatory approvals and satisfaction or waiver of other customary closing conditions. The transaction is expected to close before the end of calendar year 2020. Additionally, if the Merger Agreement is terminated as a result of reaching its termination date (10 months from the signing date unless extended by us by up to additional months) without receiving clearance to close under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 or on the termination date there is in effect an order or
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| 5. Current Liabilities | ||
Short-Term Debt | ||
On May 2, 2019 we entered into an amended and restated credit agreement with certain institutional lenders with an aggregate principal amount of $1.4 billion, including a $400 million unsecured term loan that matures on February 1, 2021 and a $1 billion unsecured revolving credit facility that matures on May 2, 2024.
Under the amended and restated agreement we may, subject to certain customary conditions including lender approval, on one or more occasions increase commitments under the term loan in an amount not to exceed $400 million in the aggregate. The term loan accrues interest at rates that are equal to, at our election, either Bank of America's alternate base rate plus a margin that ranges from 0.0 % to 0.125 % or the London Interbank Offered Rate (LIBOR) plus a margin that ranges from 0.625 % to 1.125 %. Actual margins under either election will be based on our senior debt credit ratings. The amended and restated credit agreement includes customary affirmative and negative covenants, including financial covenants that require us to maintain a ratio of total gross debt to annual earnings before interest, taxes, depreciation and amortization (EBITDA) of not greater than 3.25 to 1.00 as of any date and a ratio of annual EBITDA to annual interest expense of not less than 3.00 to 1.00 as of the last day of each fiscal quarter. As of October 31, 2020 we were compliant with all required covenants. The term loan is subject to quarterly principal payments of $12.5 million through October 31, 2020, with the balance payable on February 1, 2021. At October 31, 2020, $325 million was outstanding under the term loan and was classified as short-term debt on our condensed consolidated balance sheet. The carrying value of the term loan approximates its fair value. Interest on the term loan is payable monthly. We paid $1 million for interest on the term loan during the three months ended October 31, 2020 and $3 million during the three months ended October 31, 2019.
Unsecured Revolving Credit Facility | ||
The amended and restated credit agreement we entered into on May 2, 2019 includes a $1 billion unsecured revolving credit facility that will expire on May 2, 2024. Under this agreement we may, subject to certain customary conditions including lender approval, on one or more occasions increase commitments under the unsecured revolving credit facility in an amount not to exceed $250 million in the aggregate and may extend the maturity date up to two times. Advances under the unsecured revolving credit facility accrue interest at rates that are equal to, at our election, either Bank of America's alternate base rate plus a margin that ranges from 0.0 % to 0.1 % or LIBOR plus a margin that ranges from 0.69 % to 1.1 %. Actual margins under either election will be based on our senior debt credit ratings. The amended and restated credit agreement includes customary affirmative and negative covenants. See "Short-Term Debt" above for more information. We repaid the $1 billion that was outstanding as of July 31, 2020 under this unsecured revolving credit facility during the three months ended October 31, 2020, and at October 31, 2020 no amounts were outstanding. We paid $1 million in interest on the unsecured revolving credit facility during the three months ended October 31, 2020 and no interest during the three months ended October 31, 2019.
Other Current Liabilities | ||
Other current liabilities were as follows at the dates indicated:
| (In millions) | October 31, 2020 | July 31, 2020 |
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| Executive deferred compensation plan liabilities | $ | $ | |||||||||
| Current portion of operating lease liabilities | |||||||||||
| Reserve for promotional discounts and rebates | |||||||||||
| Reserve for returns and credits | |||||||||||
| Current portion of dividend payable | |||||||||||
| Interest payable | |||||||||||
| Other | |||||||||||
| Total other current liabilities | $ | $ | |||||||||
The balances of several of our other current liabilities, particularly our reserves for product returns and promotional discounts and rebates, are affected by the seasonality of our business. See Note 1, “Description of Business and Summary of Significant Accounting Policies – Seasonality,” for more information.
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| 6. Long-Term Obligations and Commitments | ||
Senior Unsecured Notes | ||
In June 2020 we issued four series of senior unsecured notes (together, the Notes) pursuant to a public debt offering. The proceeds from the issuance were $1.98 billion, net of debt discount of $2 million and debt issuance costs of $15 million.
The carrying value of the Notes was as follows at the dates indicated:
| (In millions) | October 31, 2020 | July 31, 2020 |
Effective Interest Rate |
||||||||||||||
| Senior unsecured notes issued June 2020: | |||||||||||||||||
| $ | $ | ||||||||||||||||
| Total senior unsecured notes | |||||||||||||||||
| Unamortized discount and debt issuance costs | ( |
( |
|||||||||||||||
| Net carrying value senior unsecured notes | $ | $ | |||||||||||||||
Interest is payable semiannually on January 15 and July 15 of each year, beginning on January 15, 2021. The discount and debt issuance costs are amortized to interest expense over the term of the Notes under the effective interest method. We paid no interest on the Notes during the three months ended October 31, 2020.
The Notes are senior unsecured obligations of Intuit and rank equally with all existing and future unsecured and unsubordinated indebtedness of Intuit and are redeemable by us at any time, subject to a make-whole premium. Upon the occurrence of change of control transactions that are accompanied by certain downgrades in the credit ratings of the Notes, we will be required to repurchase the Notes at a repurchase price equal to 101 % of the aggregate outstanding principal plus any accrued and unpaid interest to but not including the date of repurchase. The indenture governing the Notes requires us to comply with certain covenants. For example, the Notes limit our ability to create certain liens and enter into sale and leaseback transactions. As of October 31, 2020 we were compliant with all covenants governing the Notes.
Secured Revolving Credit Facility | ||
On February 19, 2019, a subsidiary of Intuit entered into a two-year $300 million secured revolving credit facility with a lender. The revolving credit facility is secured by cash and receivables of the subsidiary and is non-recourse to Intuit Inc. Advances under this secured revolving credit facility are used to fund a portion of our loans to qualified small businesses and accrue interest at LIBOR plus 2.39 %. Unused portions of the credit facility accrue interest at a rate of 0.50 %. On March 2, 2020, we amended the secured revolving credit facility to extend the commitment term from February 19, 2021 to February 19, 2022 and the final maturity date from August 19, 2021 to August 19, 2022. The agreement includes certain affirmative and negative covenants, including financial covenants that require the subsidiary to maintain specified financial ratios. As of October 31, 2020 we were compliant with all required covenants. At October 31, 2020, $48 million was outstanding under this facility, with a weighted-average interest rate of 5.70 %, which includes the unused facility fee. The outstanding balance is secured by cash and receivables of the subsidiary totaling $146 million. Interest on the facility is payable monthly. We paid $1 million for interest on the secured revolving credit facility during each of the three months ended October 31, 2020 and October 31, 2019.
Other Long-Term Obligations | ||
Other long-term obligations were as follows at the dates indicated:
| (In millions) | October 31, 2020 | July 31, 2020 |
|||||||||
| Long-term income tax liabilities | $ | $ | |||||||||
| Total dividend payable | |||||||||||
| Long-term deferred revenue | |||||||||||
| Other | |||||||||||
| Total long-term obligations | |||||||||||
| Less current portion (included in other current liabilities) | ( |
( |
|||||||||
| Long-term obligations due after one year | $ | $ | |||||||||
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Unconditional Purchase Obligations | ||
We describe our purchase obligations in Note 8 to the financial statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2020. There were no significant changes in our purchase obligations during the three months ended October 31, 2020.
| 7. Leases | ||
We lease office facilities under non-cancellable operating lease arrangements. Our facility leases generally provide for periodic rent increases and may contain escalation clauses and renewal options. Our leases have remaining lease terms of up to 10 years, some of which include one or more options to extend the leases for up to 10 years per option, generally at rates to be determined in accordance with the agreements. Options to extend the lease are included in the lease liability if they are reasonably certain of being exercised. We do not have significant finance leases.
We sublease certain office facilities to third parties. These subleases have remaining lease terms of up to 4 years, some of which include one or more options to extend the subleases for up to 5 years per option.
The components of lease expense were as follows:
| Three Months Ended | |||||||||||
| (In millions) | October 31, 2020 | October 31, 2019 | |||||||||
Operating lease cost (1)
|
$ | $ | |||||||||
| Variable lease cost | |||||||||||
| Sublease income | ( |
( |
|||||||||
| Total net lease cost | $ | $ | |||||||||
(1) Includes short-term leases, which were not significant for each of the three months ended October 31, 2020 and 2019.
Supplemental cash flow information related to operating leases was as follows:
| Three Months Ended | |||||||||||
| October 31, 2020 | October 31, 2019 | ||||||||||
| (In millions) | |||||||||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | $ | |||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities (1)
|
$ | $ | |||||||||
(1) For the three months ended October 31, 2019, this includes $319 million for operating leases existing on August 1, 2019 and $3 million for operating leases that commenced in the first three months of fiscal 2020.
Other information related to operating leases was as follows at the dates indicated:
| October 31, 2020 | July 31, 2020 |
||||||||||
| Weighted-average remaining lease term for operating leases (in years) | |||||||||||
| Weighted-average discount rate for operating leases | % | % | |||||||||
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Future minimum lease payments under non-cancellable operating leases as of October 31, 2020 were as follows:
| (In millions) |
Operating
Leases (1)
|
||||
| Fiscal year ending July 31, | |||||
| 2021 (excluding the three months ended October 31, 2020) | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total future minimum lease payments | |||||
| Less imputed interest | ( |
||||
| Present value of lease liabilities | |||||