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

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     .

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 definition 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. 313,918,834 shares of Common Stock, $0.01 par value, were outstanding at February 22, 2010.

 

 

INTUIT INC.
FORM 10-Q
INDEX

		Page
		Number
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Statements of Operations for the three and six months ended January 31, 2010 and 2009			3
Condensed Consolidated Balance Sheets at January 31, 2010 and July 31, 2009			4
Condensed Consolidated Statements of Stockholders’ Equity for the six months ended January 31, 2010 and 2009			5
Condensed Consolidated Statements of Cash Flows for the three and six months ended January 31, 2010 and 2009			6
Notes to Condensed Consolidated Financial Statements			7
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk			38
ITEM 4: Controls and Procedures			40
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings			41
ITEM 1A: Risk Factors			42
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds			45
ITEM 4: Submission of Matters to a Vote of Security Holders			46
ITEM 6: Exhibits			47
Signatures			48
Exhibit 31.01
Exhibit 31.02
Exhibit 32.01
Exhibit 32.02
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Intuit, the Intuit logo, QuickBooks, TurboTax, ProSeries, Lacerte, Digital Insight and Quicken, 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.

PART I

ITEM 1
FINANCIAL STATEMENTS

INTUIT INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended								Six Months Ended
		January 31,				January 31,				January 31,				January 31,
(In millions, except per share amounts; unaudited)		2010				2009				2010				2009
Net revenue:
Product		$	422			$	433			$	627			$	651
Service and other			415				340				684				584
Total net revenue			837				773				1,311				1,235
Costs and expenses:
Cost of revenue:
Cost of product revenue			48				56				83				88
Cost of service and other revenue			114				98				223				200
Amortization of purchased intangible assets			16				14				38				29
Selling and marketing			277				271				457				451
Research and development			144				140				285				274
General and administrative			88				70				165				134
Acquisition-related charges			11				13				21				23
Total costs and expenses			698				662				1,272				1,199
Operating income from continuing operations			139				111				39				36
Interest expense			(15	)			(12	)			(31	)			(24	)
Interest and other income, net			2				6				7				5
Income from continuing operations before income taxes			126				105				15				17
Income tax provision (benefit)			46				19				4				(17	)
Net income from continuing operations			80				86				11				34
Net income (loss) from discontinued operations			34				(1	)			35				(1	)
Net income		$	114			$	85			$	46			$	33
Basic net income per share from continuing operations		$	0.25			$	0.27			$	0.04			$	0.10
Basic net income (loss) per share from discontinued operations			0.11				—				0.11				—
Basic net income per share		$	0.36			$	0.27			$	0.15			$	0.10
Shares used in basic per share calculations			314				321				317				322
Diluted net income per share from continuing operations		$	0.25			$	0.26			$	0.03			$	0.10
Diluted net income (loss) per share from discontinued operations			0.10				—				0.11				—
Diluted net income per share		$	0.35			$	0.26			$	0.14			$	0.10
Shares used in diluted per share calculations			323				326				326				329

See accompanying notes.

CONDENSED CONSOLIDATED BALANCE SHEETS

		January 31,				July 31,
(In millions; unaudited)		2010				2009
ASSETS
Current assets:
Cash and cash equivalents		$	337			$	679
Investments			609				668
Accounts receivable, net			468				135
Income taxes receivable			23				67
Deferred income taxes			80				92
Prepaid expenses and other current assets			86				43
Current assets of discontinued operations			—				12
Current assets before funds held for customers			1,603				1,696
Funds held for customers			313				272
Total current assets			1,916				1,968
Long-term investments			92				97
Property and equipment, net			518				527
Goodwill			1,853				1,754
Purchased intangible assets, net			269				291
Long-term deferred income taxes			43				36
Other assets			87				77
Long-term assets of discontinued operations			—				76
Total assets		$	4,778			$	4,826
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	159			$	103
Accrued compensation and related liabilities			135				171
Deferred revenue			511				360
Income taxes payable			2				—
Other current liabilities			234				153
Current liabilities of discontinued operations			—				25
Current liabilities before customer fund deposits			1,041				812
Customer fund deposits			313				272
Total current liabilities			1,354				1,084
Long-term debt			998				998
Other long-term obligations			170				187
Total liabilities			2,522				2,269
Commitments and contingencies
Stockholders’ equity:
Preferred stock			—				—
Common stock and additional paid-in capital			2,599				2,547
Treasury stock, at cost			(3,220	)			(2,846	)
Accumulated other comprehensive income			8				7
Retained earnings			2,869				2,849
Total stockholders’ equity			2,256				2,557
Total liabilities and stockholders’ equity		$	4,778			$	4,826

See accompanying notes.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

						Common
						Stock and								Accumulated
		Shares of				Additional								Other								Total
(In millions, except shares in		Common				Paid-In				Treasury				Comprehensive				Retained				Stockholders’
thousands; unaudited)		Stock				Capital				Stock				Income				Earnings				Equity
Balance at July 31, 2009			322,766			$	2,547			$	(2,846	)		$	7			$	2,849			$	2,557
Components of comprehensive net income:
Net income			—				—				—				—				46				46
Other comprehensive income, net of tax			—				—				—				1				—				1
Comprehensive net income																							47
Issuance of common stock under employee stock plans			6,851				2				150				—				(2	)			150
Restricted stock units released, net of taxes			1,430				(22	)			26				—				(24	)			(20	)
Stock repurchases under stock repurchase programs			(18,814	)			—				(550	)			—				—				(550	)
Tax benefit from employee stock option transactions			—				10				—				—				—				10
Share-based compensation			—				65				—				—				—				65
Other			—				(3	)			—				—				—				(3	)
Balance at January 31, 2010			312,233			$	2,599			$	(3,220	)		$	8			$	2,869			$	2,256
						Common
						Stock and								Accumulated
		Shares of				Additional								Other								Total
(In millions, except shares in		Common				Paid-In				Treasury				Comprehensive				Retained				Stockholders’
thousands; unaudited)		Stock				Capital				Stock				Income (Loss)				Earnings				Equity
Balance at July 31, 2008			322,600			$	2,415			$	(2,787	)		$	8			$	2,444			$	2,080
Components of comprehensive net income:
Net income			—				—				—				—				33				33
Other comprehensive loss, net of tax			—				—				—				(16	)			—				(16	)
Comprehensive net income																							17
Issuance of common stock under employee stock plans			4,911				—				106				—				(11	)			95
Restricted stock units released, net of taxes			919				(14	)			20				—				(20	)			(14	)
Stock repurchases under stock repurchase programs			(7,383	)			—				(200	)			—				—				(200	)
Tax benefit from employee stock option transactions			—				7				—				—				—				7
Share-based compensation			—				57				—				—				—				57
Other			—				(6	)			—				—				—				(6	)
Balance at January 31, 2009			321,047			$	2,459			$	(2,861	)		$	(8	)		$	2,446			$	2,036

See accompanying notes.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Three Months Ended								Six Months Ended
		January 31,				January 31,				January 31,				January 31,
(In millions; unaudited)		2010				2009				2010				2009
Cash flows from operating activities:
Net income		$	114			$	85			$	46			$	33
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation			36				36				75				69
Amortization of intangible assets			32				30				68				57
Share-based compensation			38				35				65				57
Pre-tax gain on sale of IRES (1)			(58	)			—				(58	)			—
Deferred income taxes			2				(1	)			(22	)			44
Tax benefit from share-based compensation plans			4				(4	)			10				7
Excess tax benefit from share-based compensation plans			(2	)			—				(5	)			(6	)
Other			6				2				10				7
Total adjustments			58				98				143				235
Changes in operating assets and liabilities:
Accounts receivable			(318	)			(300	)			(331	)			(317	)
Prepaid expenses, income taxes receivable and other assets			51				7				(5	)			(114	)
Accounts payable			47				(7	)			56				15
Accrued compensation and related liabilities			19				16				(38	)			(97	)
Deferred revenue			180				140				156				122
Income taxes payable			2				1				2				(13	)
Other liabilities			92				103				76				79
Total changes in operating assets and liabilities			73				(40	)			(84	)			(325	)
Net cash provided by (used in) operating activities (1)			245				143				105				(57	)
Cash flows from investing activities:
Purchases of available-for-sale debt securities			(162	)			(31	)			(550	)			(67	)
Sales of available-for-sale debt securities			96				117				418				264
Maturities of available-for-sale debt securities			7				13				43				24
Net change in funds held for customers’ money market funds and other cash equivalents			41				34				107				317
Purchases of property and equipment			(34	)			(50	)			(66	)			(117	)
Net change in customer fund deposits			20				(34	)			41				(317	)
Acquisitions of businesses, net of cash acquired			(141	)			—				(141	)			—
Proceeds from divestiture of business			122				—				122				—
Other			(3	)			1				(6	)			4
Net cash provided by (used in) investing activities			(54	)			50				(32	)			108
Cash flows from financing activities:
Net proceeds from issuance of common stock under stock plans			85				18				150				95
Tax payments related to issuance of restricted stock units			(5	)			(2	)			(20	)			(14	)
Purchase of treasury stock			(250	)			(35	)			(550	)			(200	)
Excess tax benefit from share-based compensation plans			2				—				5				6
Other			—				(2	)			(1	)			(2	)
Net cash used in financing activities			(168	)			(21	)			(416	)			(115	)
Effect of exchange rates on cash and cash equivalents			1				(2	)			1				(10	)
Net increase (decrease) in cash and cash equivalents			24				170				(342	)			(74	)
Cash and cash equivalents at beginning of period			313				169				679				413
Cash and cash equivalents at end of period		$	337			$	339			$	337			$	339

See accompanying notes.

INTUIT INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Description of Business, Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

Intuit Inc. provides business and financial management solutions for small and medium-sized businesses, consumers, accounting professionals and financial institutions. Our flagship products and services, including QuickBooks, Quicken and TurboTax, simplify small business management and payroll processing, personal finance, and tax preparation and filing. ProSeries and Lacerte are Intuit’s tax preparation offerings for professional accountants. Our financial institutions division, anchored by Digital Insight, provides outsourced online banking services to banks and credit unions. Incorporated in 1984 and headquartered in Mountain View, California, we sell our products and services primarily in the United States.

Basis of Presentation

These condensed consolidated financial statements include the financial statements of Intuit and its wholly owned subsidiaries. We have eliminated all significant intercompany balances and transactions in consolidation. In July 2009 we acquired PayCycle, Inc. for a total purchase price of approximately $169 million and in November 2009 we acquired Mint Software Inc. for total consideration of approximately $170 million. Accordingly, we have included the results of operations for PayCycle and Mint in our consolidated results of operations from their respective dates of acquisition. In January 2010 we sold our Intuit Real Estate Solutions (IRES) business. Accordingly, we have reclassified our financial statements for all periods prior to the sale to reflect IRES as discontinued operations. Unless noted otherwise, discussions in these notes pertain to our continuing operations.

These condensed consolidated financial statements also include the financial position, results of operations and cash flows of Superior Bankcard Services, LLC (SBS), an entity that acquired merchant accounts for our Payment Solutions business. We were allocated 51% of the earnings and losses of this entity and 100% of the losses in excess of the noncontrolling interest capital balances. We therefore eliminated the portion of the SBS financial results that pertained to the noncontrolling interests in our statements of operations and on our balance sheets. The amounts eliminated were not material for any period presented. On December 7, 2009 we purchased all of the noncontrolling members’ interests in SBS for a total price of approximately $9 million, net of loan repayments. See Note 8.

We have included all adjustments, consisting only of normal recurring items, that we considered necessary for a fair presentation of our financial results for the interim periods presented. These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2009. Results for the three and six months ended January 31, 2010 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2010 or any other future period.

We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to reportable segments and discontinued operations.

Seasonality

Our QuickBooks, Consumer Tax and Accounting Professionals businesses are highly seasonal. Revenue from our QuickBooks software products tends to be highest during our second and third fiscal quarters. Sales of income tax preparation products and services are heavily concentrated in the period from November through April. Seasonal patterns mean that our total net revenue is usually highest during our second quarter ending January 31 and third quarter ending April 30. We typically report losses in our first quarter ending October 31 and fourth quarter ending July 31, when revenue from our tax businesses is minimal while operating expenses continue at relatively consistent levels.

Significant Accounting Policies

We describe our significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2009. On August 1, 2009 we adopted the Financial Accounting

Standards Board (FASB) Accounting Standards Codification (ASC) as the sole source for authoritative guidance. On August 1, 2009 we also adopted certain authoritative guidance on fair value measurements for nonfinancial assets and nonfinancial liabilities and on business combinations that affected our significant accounting policies. See “Fair Value of Nonfinancial Assets and Nonfinancial Liabilities” and “Business Combinations” below. There have been no other changes to our significant accounting policies during fiscal 2010.

We describe our accounting policies for the valuation of goodwill, purchased intangible assets and other long-lived assets in “Goodwill, Purchased Intangible Assets and Other Long-Lived Assets” 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, 2009. On August 1, 2009 we adopted the provisions of the authoritative guidance on fair value measurements for nonfinancial assets and nonfinancial liabilities that we do not recognize or disclose at fair value on a recurring basis (at least annually). These include reporting units measured at fair value in a goodwill impairment test, other nonfinancial assets or liabilities measured at fair value for impairment testing, and nonfinancial assets acquired and liabilities assumed in a business combination. In accordance with this guidance, we define fair value as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As a result, we now estimate the fair values of these assets and liabilities from the perspective of a market participant rather than from an entity-specific perspective. In addition, we consider and use all valuation methods that are appropriate in estimating the fair value of these assets and liabilities. See Note 2, “Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis,” for information on the impact of our adoption of this guidance.

On August 1, 2009 we adopted the acquisition method of accounting for business combinations. The acquisition method of accounting requires us to use significant estimates and assumptions, including fair value estimates, as of the business combination date and to refine those estimates as necessary during the measurement period (defined as the period, not to exceed one year, in which we may adjust the provisional amounts recognized for a business combination) in a manner that is generally similar to the previous purchase method of accounting.

Under the acquisition method of accounting we recognize separately from goodwill the identifiable assets acquired, the liabilities assumed, and any noncontrolling interests in an acquiree, generally at the acquisition date fair value. We measure goodwill as of the acquisition date as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed. Costs that we incur to complete the business combination such as investment banking, legal and other professional fees are not considered part of consideration and we charge them to general and administrative expense as they are incurred. Under the acquisition method we also account for acquired company restructuring activities that we initiate separately from the business combination.

Should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period, we report provisional amounts in our financial statements. During the measurement period, we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our financial statements. We apply those measurement period adjustments that we determine to be significant retrospectively to comparative information in our financial statements, including adjustments to depreciation and amortization expense.

Under the acquisition method of accounting for business combinations, if we identify changes to deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period adjustment and we record the offset to goodwill. We record all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense. This accounting applies to all of our acquisitions regardless of acquisition date.

On August 1, 2009 we adopted authoritative guidance for the determination of the useful lives of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to

determine the useful lives of recognized intangible assets. Our adoption of this guidance had no impact on our financial position, results of operations or cash flows.

On August 1, 2009 we adopted authoritative guidance for the accounting and reporting of noncontrolling interests in consolidated entities and for the deconsolidation of those entities. As a result of our adoption of this guidance, we retrospectively reclassified the balances for the noncontrolling interest in SBS to stockholders’ equity for all periods presented. These balances were not significant. The expense that we recorded for the noncontrolling interest in SBS’s income was not significant compared with our consolidated financial results for any period presented and we have therefore included it in interest and other income, net in our statements of operations.

On November 1, 2009 we adopted authoritative guidance for measuring liabilities at fair value. This guidance amends the factors that should be considered in fair value measurements of liabilities when a quoted price in an active market is not available. Our adoption of this guidance had no impact on our financial position, results of operations or cash flows.

Computation of Net Income (Loss) Per Share

We compute basic net income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares include shares issuable upon the exercise of stock options and upon the vesting of restricted stock units (RSUs) under the treasury stock method.

We include stock options with combined exercise prices, unrecognized compensation expense and tax benefits that are less than the average market price for our common stock, and RSUs with unrecognized compensation expense and tax benefits that are less than the average market price for our common stock, in the calculation of diluted net income per share. We exclude stock options with combined exercise prices, unrecognized compensation expense and tax benefits that are greater than the average market price for our common stock, and RSUs with unrecognized compensation expense and tax benefits that are greater than the average market price for our common stock, from the calculation of diluted net income per share because their effect is anti-dilutive. Under the treasury stock method, the amount that must be paid to exercise stock options, the amount of compensation expense for future service that we have not yet recognized for stock options and RSUs, and the amount of tax benefits that will be recorded in additional paid-in capital when the awards become deductible are assumed to be used to repurchase shares.

In loss periods, basic net loss per share and diluted net loss per share are identical since the effect of potential common shares is anti-dilutive and therefore excluded.

The following table presents the composition of shares used in the computation of basic and diluted net income per share for the periods indicated.

		Three Months Ended								Six Months Ended
		January 31,				January 31,				January 31,				January 31,
(In millions, except per share amounts)		2010				2009				2010				2009
Numerator:
Net income from continuing operations		$	80			$	86			$	11			$	34
Net income (loss) from discontinued operations			34				(1	)			35				(1	)
Net income		$	114			$	85			$	46			$	33
Denominator:
Shares used in basic per share amounts:
Weighted average common shares outstanding			314				321				317				322
Shares used in diluted per share amounts:
Weighted average common shares outstanding			314				321				317				322
Dilutive common equivalent shares from stock options and restricted stock awards			9				5				9				7
Dilutive weighted average common shares outstanding			323				326				326				329
Basic and diluted net income (loss) per share:
Basic net income per share from continuing operations		$	0.25			$	0.27			$	0.04			$	0.10
Basic net income (loss) per share from discontinued operations			0.11				—				0.11				—
Basic net income per share		$	0.36			$	0.27			$	0.15			$	0.10
Diluted net income per share from continuing operations		$	0.25			$	0.26			$	0.03			$	0.10
Diluted net income (loss) per share from discontinued operations			0.10				—				0.11				—
Diluted net income per share		$	0.35			$	0.26			$	0.14			$	0.10
Weighted average stock options and restricted stock units excluded from calculation due to anti-dilutive effect			13				33				25				27

No customer accounted for 10% or more of total net revenue in the three or six months ended January 31, 2010 or 2009. Due to the seasonality of our business, at January 31, 2010 the account of one retail customer represented approximately 16% of total accounts receivable and the account of another retail customer represented approximately 10% of total accounts receivable. No customer accounted for 10% or more of total accounts receivable at July 31, 2009.

In October 2009 the FASB issued Accounting Standards Update (ASU) No. 2009-13, “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements — a Consensus of the FASB Emerging Issues Task Force.” This update provides amendments to the criteria in ASC Topic 605, “Revenue Recognition,” for separating consideration

in multiple-deliverable arrangements by establishing a selling price hierarchy. The selling price used for each deliverable will be based on vendor-specific objective evidence (VSOE) if available, third-party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. ASU 2009-13 also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which means that it will be effective for our fiscal year beginning August 1, 2010. We are in the process of evaluating this update and therefore have not yet determined the impact that adoption of ASU 2009-13 will have on our financial position, results of operations or cash flows.

ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements”

In January 2010 the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements.” This update amends the disclosure requirements about fair value measurements in ASC Topic 820, “Fair Value Measurements and Disclosures.” ASU 2010-06 requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, which means that it will be effective for our third fiscal quarter beginning February 1, 2010. We expect that the adoption of this update will have no significant impact on our financial position, results of operations or cash flows.

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 the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We measure and disclose the fair value of certain assets and liabilities on a recurring basis and other assets and liabilities on a non-recurring basis, as described below. The authoritative guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.

	•		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 for similar assets or liabilities in active markets; 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.
	•		Level 3 uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Our cash equivalents, available-for-sale debt securities and long-term debt are measured at fair value on a recurring basis. We have classified these assets and liabilities in accordance with the fair value hierarchy. In instances where the inputs used to measure the fair value of an asset or liability fall into more than one level of the fair value hierarchy, we have classified them based on the lowest level input that is significant to the determination of the fair value.

The following table presents financial assets and financial liabilities that we measured at fair value on a recurring basis at the date indicated.

		January 31, 2010																July 31, 2009
														Total																Total
(In millions)		Level 1				Level 2				Level 3				Fair Value				Level 1				Level 2				Level 3				Fair Value
Assets:
Cash equivalents (1)		$	439			$	—			$	—			$	439			$	893			$	—			$	—			$	893
Available-for-sale debt securities:
Municipal bonds (2)			—				409				—				409				—				448				—				448
Corporate notes (2)			—				152				—				152				—				44				—				44
U.S. agency securities (2)			—				60				—				60				—				25				—				25
U.S. treasuries (2)			—				9				—				9				—				—				—				—
Municipal auction rate securities (3)			—				—				216				216				—				—				245				245
Total assets		$	439			$	630			$	216			$	1,285			$	893			$	517			$	245			$	1,655
Liabilities:
Long-term debt (4)		$	—			$	1,070			$	—			$	1,070			$	—			$	1,001			$	—			$	1,001

The following table presents a reconciliation of financial assets that we measure at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated.

		Three Months				Six Months
		Ended				Ended
		January 31,				January 31,
(In millions)		2010				2010
Beginning balance		$	224			$	245
Settlements at par			(8	)			(29	)
Ending balance		$	216			$	216

Financial assets whose fair values we measure using Level 3 inputs consisted of municipal auction rate securities. We classified $127 million and $151 million of these securities as short-term investments and $89 million and $94 million as long-term investments on our balance sheets at January 31, 2010 and July 31, 2009. At these dates all of the municipal auction rate securities we held were rated A or better by the major credit rating agencies and 84% or more were collateralized by student loans guaranteed by the U.S. Department of Education. These securities are long-term debt instruments that are intended to provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined intervals, typically every 35 days. Due to a decrease in liquidity in the global credit markets, in February 2008 auctions began failing for the municipal auction rate securities we held. Regularly scheduled auctions for these securities have generally continued to fail since that time. When these auctions initially failed, higher interest rates for many of the securities went into effect in accordance with the terms of the prospectus for each security. As of January 31, 2010, we had received all interest payments in accordance with the contractual terms of these securities.

We estimated the fair values of the municipal auction rate securities we held at January 31, 2010 based on a discounted cash flow model that we prepared. Key inputs to our discounted cash flow model included the projected future interest rates; the likely timing of principal repayments; the probability of full repayment considering guarantees by the U.S. Department of Education of the underlying student loans or insurance by other third parties;

publicly available pricing data for recently issued student loan backed securities that are not subject to auctions; and the impact of the reduced liquidity for auction rate securities. The following table presents information about significant inputs to our discounted cash flow model at the dates shown:

		Inputs to Model at
		January 31,				July 31,
		2010				2009
Range of average projected future yield rates		1.90% - 3.39%				0.63% - 3.78%
Range of overall discount rates used in model (like-kind security yield rate plus illiquidity factor)		1.47% - 1.72%				1.61% - 1.86%
Like-kind security yield rate		0.22%				0.36%
Range of illiquidity factors		125 - 150 bps				125 - 150 bps
Expected holding period in years		7				7

Using our discounted cash flow model we determined that the fair values of the municipal auction rate securities we held at January 31, 2010 were approximately equal to their par values. As a result, we recorded no decrease in the fair values of those securities for the three or six months then ended. We do not intend to sell our municipal auction rate securities and it is not more likely than not that we will be required to sell them before recovery at par. Based on the maturities of the underlying securities and the put option described below, we classified $127 million and $151 million of these securities as short-term investments and $89 million and $94 million as long-term investments on our balance sheets at January 31, 2010 and July 31, 2009.

In August 2008 the broker-dealers for our municipal auction rate securities announced settlements under which they may provide liquidity solutions, or purchase, the auction rate securities held by their institutional clients. On November 4, 2008 we accepted an offer from UBS AG (UBS), one of the broker-dealers for our municipal auction rate securities, that gives us the option to sell UBS a total of $127 million in municipal auction rate securities at par value at any time during a two-year period beginning June 30, 2010. The put option also gives UBS the discretion to buy any or all of these securities from us at par value at any time. To date UBS has not purchased any of these securities from us. We chose not to elect the fair value option for the put option at the time we accepted the UBS offer. We accounted for the put option at its cost of zero on November 4, 2008, the date that we entered into the agreement, because we considered the value of the securities subject to the put option to be substantially equal to their par values at that date. The put option is considered to be a separate and freestanding financial instrument between UBS and Intuit because it is non-transferable and could not be attached to the related auction rate securities if they were to be sold to a third party. Since the put option is freestanding, we did not consider the option when estimating the fair value of the UBS auction rate securities we held at January 31, 2010 and July 31, 2009. We currently intend to exercise our option to sell UBS all of these municipal auction rate securities at par value in accordance with the terms of the offer within the next twelve months.

Based on our expected operating cash flows and our other sources of cash, we do not believe that the reduction in liquidity of our municipal auction rate securities will have a material impact on our overall ability to meet our liquidity needs.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

As discussed in Note 1, “Significant Accounting Policies,” on August 1, 2009 we adopted the provisions of the authoritative guidance on fair value measurements for nonfinancial assets and nonfinancial liabilities that we do not recognize or disclose at fair value on a recurring basis (at least annually). These include reporting units measured at fair value in a goodwill impairment test, other nonfinancial assets or liabilities measured at fair value for impairment testing, and nonfinancial assets acquired and liabilities assumed in a business combination. In the absence of an event or circumstance that indicates that the carrying value of a reporting unit may not be recoverable, we test our goodwill for impairment annually during our fourth fiscal quarter.

3. Cash and Cash Equivalents, Investments and Funds Held for Customers

We consider highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents consist primarily of AAA-rated money market funds in all periods presented. Investments consist of available-for-sale investment-grade debt securities and municipal auction rate securities that we carry at fair value. Funds held for customers consist of cash, AAA-rated money market funds and available-for-sale investment-grade debt securities. Long-term investments consist primarily of municipal auction rate securities that we carry at fair value. Due to a decrease in liquidity in the global credit markets, we estimate the fair values of our municipal auction rate securities based on a discounted cash flow model that we prepare. See Note 2 for more information. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market funds, we diversify our investments by limiting our holdings with any individual issuer.

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

		January 31, 2010								July 31, 2009
(In millions)		Cost				Fair Value				Cost				Fair Value
Classification on balance sheets:
Cash and cash equivalents		$	337			$	337			$	679			$	679
Investments			607				609				666				668
Funds held for customers			313				313				272				272
Long-term investments			92				92				97				97
Total cash and cash equivalents, investments and funds held for customers		$	1,349			$	1,351			$	1,714			$	1,716
The following table summarizes our cash and cash equivalents, investments and funds held for customers by investment category at the dates indicated.
		January 31, 2010								July 31, 2009
(In millions)		Cost				Fair Value				Cost				Fair Value
Type of issue:
Total cash and cash equivalents		$	502			$	502			$	951			$	951
Available-for-sale debt securities:
Municipal bonds			408				409				447				448
Municipal auction rate securities			216				216				245				245
Corporate notes			151				152				43				44
U.S. agency securities			60				60				25				25
U.S. treasuries			9				9				—				—
Total available-for-sale debt securities			844				846				760				762
Other long-term investments			3				3				3				3
Total cash and cash equivalents, investments and funds held for customers		$	1,349			$	1,351			$	1,714			$	1,716

We include realized gains and losses on our available-for-sale debt securities in interest and other income, net in our statements of operations. Gross realized gains and losses on our available-for-sale debt securities for the three and six months ended January 31, 2010 and 2009 were not significant.

We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in accumulated other comprehensive income in the stockholders’ equity section of our balance sheets. Gross unrealized gains and losses on our available-for-sale debt securities at January 31, 2010 and July 31, 2009 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 January 31, 2010 were not other-than-temporarily impaired. While certain available-for-sale debt securities have fair values that are below cost, we do not intend to sell these securities and it is not more likely than not that we will be

required to sell them before recovery at par. The unrealized losses at January 31, 2010 are due to changes in interest rates, including market credit spreads, and not due to increased credit risks associated with the specific securities.

The following table summarizes our available-for-sale debt securities classified by the stated maturity date of the security at the dates indicated.

		January 31, 2010								July 31, 2009
(In millions)		Cost				Fair Value				Cost				Fair Value
Due within one year		$	189			$	190			$	185			$	186
Due within two years			268				269				159				160
Due within three years			8				8				5				5
Due after three years			379				379				411				411
Total available-for-sale debt securities		$	844			$	846			$	760			$	762

Available-for-sale debt securities due after three years in the table above included $216 million and $230 million in municipal auction rate securities at January 31, 2010 and July 31, 2009, of which $127 million and $136 million were subject to the UBS put option that is effective in June 2010. See Note 2. All of the remaining available-for-sale debt securities had an interest reset date, put date or mandatory call date within two years of those dates.

4. Comprehensive Net Income (Loss)

We add components of other comprehensive income or loss, such as changes in the fair value of available-for-sale debt securities and foreign currency translation adjustments, to our net income or loss to arrive at comprehensive net income or loss. Other comprehensive income or loss items have no impact on our net income or loss as presented in our statements of operations.

The components of comprehensive net income, net of income taxes, were as shown in the following table for the periods indicated.

		Three Months Ended								Six Months Ended
		January 31,				January 31,				January 31,				January 31,
(In millions)		2010				2009				2010				2009
Net income		$	114			$	85			$	46			$	33
Components of other comprehensive income (loss):
Changes in net unrealized gains (losses) on investments, net of reclassification adjustment for realized gains (losses), net of income taxes			—				(9	)			—				(10	)
Foreign currency translation adjustment, net of income taxes			1				—				1				(6	)
Total other comprehensive income (loss), net of income taxes			1				(9	)			1				(16	)
Comprehensive net income, net of income taxes		$	115			$	76			$	47			$	17
Income tax provision (benefit) netted against other comprehensive income (loss)		$	—			$	(6	)		$	—			$	(10	)

 

15

5. Business Combinations

Mint Software Inc.

On November 2, 2009 we acquired all of the outstanding equity interests of Mint Software Inc. for total consideration of approximately $170 million. The total consideration included approximately $24 million for the fair value of assumed equity awards and cash retention bonuses that will be charged to expense over a three year service period. Mint is a provider of online personal finance services and became part of our Other Businesses segment. We acquired Mint to expand our online personal finance offerings in support of our Connected Services strategy.

Under the acquisition method of accounting we allocated the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned to identifiable intangible assets acquired were based on estimates and assumptions determined by management. We recorded the excess of consideration over the aggregate fair values as goodwill. Using information available at the time the acquisition closed, we allocated approximately $1 million of the consideration to tangible assets and liabilities and approximately $43 million of the consideration to identified intangible assets. We recorded the excess consideration of approximately $102 million as goodwill, none of which is deductible for income tax purposes. The identified intangible assets are being amortized over a weighted average life of seven years.

We have included Mint’s results of operations in our consolidated results of operations from the date of acquisition. Mint’s results of operations for periods prior to the date of acquisition were not material when compared with our consolidated results of operations.

PayCycle, Inc.

On July 23, 2009 we acquired all of the outstanding equity interests of PayCycle, Inc. for a total purchase price of approximately $169 million, including the fair value of certain assumed stock options. PayCycle is a provider of online payroll solutions to small businesses and became part of our Employee Management Solutions segment. We acquired PayCycle to expand our online payroll offerings in support of our Connected Services strategy.

Under the purchase method of accounting we allocated the total purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned to identifiable intangible assets acquired were based on estimates and assumptions determined by management. We recorded the excess of purchase price over the aggregate fair values as goodwill. Using information available at the time the acquisition closed, we allocated approximately $5 million of the purchase price to tangible assets and liabilities and approximately $42 million of the purchase price to identified intangible assets. We recorded the excess purchase price of approximately $122 million as goodwill, none of which is deductible for income tax purposes. We may adjust the preliminary purchase price allocation after obtaining more information about asset valuations and liabilities assumed. The identified intangible assets are being amortized over a weighted average life of seven years.

We have included PayCycle’s results of operations in our consolidated results of operations from the date of acquisition. PayCycle’s results of operations for periods prior to the date of acquisition were not material when compared with our consolidated results of operations.

6. Discontinued Operations

In January 2010 we sold our Intuit Real Estate Solutions (IRES) business for approximately $128 million in cash and recorded a net gain on disposal of $35 million. The decision to sell IRES was a result of management’s desire to focus resources on Intuit’s core products and services. IRES was part of our Other Businesses segment.

We determined that IRES became a discontinued operation in the second quarter of fiscal 2010. We have therefore segregated the net assets and operating results of IRES from continuing operations on our balance sheets and in our statements of operations for all periods prior to the sale. Assets held for sale at July 31, 2009 consisted primarily of goodwill. Because IRES operating cash flows were not material for any period presented, we have not segregated them from continuing operations on our statements of cash flows. We have presented the effect of the net gain on disposal of IRES in net income from discontinued operations on our statements of cash flows for the three and six months ended January 31, 2010.

Net revenue and net income (loss) from IRES discontinued operations were as shown in the following table for the periods indicated.

		Three Months Ended								Six Months Ended
		January 31,				January 31,				January 31,				January 31,
(In millions)		2010				2009				2010				2009
Net revenue from discontinued operations		$	14			$	18			$	33			$	37
Net income (loss) from discontinued operations
Net loss from discontinued operations		$	(1	)		$	(1	)		$	—			$	(1	)
Net gain on disposal of discontinued operations			35				—				35				—
Total net income (loss) from discontinued operations		$	34			$	(1	)		$	35			$	(1	)

On March 22, 2007 we entered into an agreement with certain institutional lenders for a $500 million unsecured revolving credit facility that will expire on March 22, 2012. Advances under the credit facility will accrue interest at rates that are equal to, at our election, either Citibank’s base rate or the London InterBank Offered Rate (LIBOR) plus a margin that ranges from 0.18% to 0.575% based on our senior debt credit ratings. The applicable interest rate will be increased by 0.05% for any period in which the total principal amount of advances and letters of credit under the credit facility exceeds $250 million. The agreement includes 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 and a ratio of annual EBITDA to interest payable of not less than 3.00 to 1.00. We were in compliance with these covenants at January 31, 2010. We may use amounts borrowed under this credit facility for general corporate purposes or for future acquisitions or expansion of our business. To date we have not borrowed under this credit facility.

Other current liabilities were as follows at the dates indicated:

		January 31,				July 31,
(In millions)		2010				2009
Reserve for product returns		$	79			$	22
Reserve for rebates			44				30
Interest payable			21				21
Executive deferred compensation plan			40				37
Current portion of license fee payable			10				10
Other			40				33
Total other current liabilities		$	234			$	153

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, “Seasonality.”

On March 12, 2007 we issued $500 million of 5.40% senior unsecured notes due on March 15, 2012 and $500 million of 5.75% senior unsecured notes due on March 15, 2017 (together, the Notes), for a total principal amount of $1 billion. The Notes are redeemable by Intuit at any time, subject to a make-whole premium. We paid $28 million in cash for interest on the Notes during the six months ended January 31, 2010 and 2009. Based on the trading prices of the Notes at January 31, 2010 and July 31, 2009 and the interest rates we could obtain for other borrowings with similar terms at those dates, the estimated fair value of the Notes at those dates was approximately $1.1 billion and $1.0 billion.

Other long-term obligations were as follows at the dates indicated:

		January 31,				July 31,
(In millions)		2010				2009
Total license fee payable		$	73			$	71
Total deferred rent			60				64
Long-term deferred revenue			26				20
Long-term income tax liabilities			27				48
Other			3				4
Total long-term obligations			189				207
Less current portion (included in other current liabilities)			(19	)			(20	)
Long-term obligations due after one year		$	170			$	187

Innovative Merchant Solutions Loan and Buyout Commitments

In April 2005 our wholly owned subsidiary, Innovative Merchant Solutions (IMS), became a member of Superior Bankcard Services, LLC (SBS), a newly formed entity that acquired merchant accounts for our Payment Solutions business. Our consolidated financial statements include the financial position, results of operations and cash flows of SBS, after elimination of all significant intercompany balances and transactions, including amounts outstanding under the credit agreement described below. In connection with the formation of this entity IMS agreed to provide to SBS revolving loans in an amount of up to $40 million under the terms of a credit agreement. Amounts outstanding under this agreement at July 31, 2009 totaled $7 million at interest rates of 4.3% to 5.0%. On December 7, 2009 we purchased all of the noncontrolling members’ interests in SBS for a total price of approximately $9 million, net of loan repayments.

9. Income Taxes

Effective Tax Rate

We compute our provision for or benefit from income taxes by applying the estimated annual effective tax rate to income or loss from recurring operations and other taxable items. Our effective tax rate for the three months ended January 31, 2010 was approximately 37%. This differed from the federal statutory rate of 35% due to state income taxes, which were partially offset by the benefit we received from the domestic production activities deduction and the federal and state research and experimentation credits. Our effective tax rate for the three months ended January 31, 2009 was approximately 18%. Excluding discrete tax benefits primarily related to a favorable agreement we entered into with a tax authority with respect to tax years ended prior to fiscal 2009, our effective tax rate for that period was approximately 36% and did not differ significantly from the federal statutory rate of 35%.

Our effective tax rate for the six months ended January 31, 2010 was approximately 27%. Excluding discrete tax benefits primarily related to routine stock option deduction benefits, our effective tax rate for that period was approximately 37%. This differed from the federal statutory rate of 35% primarily due to state income taxes, which

were partially offset by the benefit we received from the domestic production activities deduction and the federal and state research and experimentation credits. We recorded a tax benefit of $17 million on pre-tax income of $17 million for the six months ended January 31, 2009. Excluding discrete tax benefits primarily related to a favorable agreement we entered into with a tax authority as described above and the retroactive reinstatement of the federal research and experimentation credit, our effective tax rate for that period was approximately 36% and did not differ significantly from the federal statutory rate of 35%.

Unrecognized Tax Benefits and Other Considerations

The total amount of our unrecognized tax benefits at July 31, 2009 was $40 million. Net of related deferred tax assets, unrecognized tax benefits were $33 million at that date. If we were to recognize these net benefits, our income tax expense would reflect a favorable net impact of $28 million. The recognition of the balance of these net benefits would result in an increase to stockholders’ equity of $5 million. There were no material changes to these amounts during the three and six months ended January 31, 2010. We do not believe that it is reasonably possible that there will be a significant increase or decrease in unrecognized tax benefits over the next 12 months.

10. Stockholders’ Equity

Stock Repurchase Programs

Intuit’s Board of Directors has authorized a series of common stock repurchase programs. Shares of common stock repurchased under these programs become treasury shares. We repurchased 8.2 million and 18.8 million shares for $250 million and $550 million under these programs during the three and six months ended January 31, 2010. We repurchased 1.4 million and 7.4 million shares for $35 million and $200 million under these programs during the three and six months ended January 31, 2009. At January 31, 2010, we had authorization from our Board of Directors to expend up to an additional $350 million for stock repurchases through November 20, 2012.

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.

A summary of activity under all share-based compensation plans for the six months ended January 31, 2010 was as follows:

						Options Outstanding
										Weighted
										Average
		Shares								Exercise
		Available				Number				Price
(Shares in thousands)		for Grant				of Shares				Per Share
Balance at July 31, 2009			8,086				45,674			$	26.00
Additional shares authorized			9,000				—				—
Options assumed and converted related to business combinations			—				372				3.08
Options granted			(1,390	)			1,390				30.04
Restricted stock units granted			(994	)			—				—
Options exercised			—				(6,300	)			21.80
Options canceled or expired (1)			1,612				(1,864	)			28.94
Restricted stock units forfeited (1)			815				—				—
Balance at January 31, 2010			17,129				39,272			$	26.46
Exercisable at January 31, 2010							27,467			$	25.75
(1)    Stock options and restricted stock units canceled, expired or forfeited under expired plans are not returned to the pool of shares available for grant.
Restricted Stock Unit Activity A summary of restricted stock unit activity for the six months ended January 31, 2010 was as follows:
						Restricted Stock Units
										Weighted
										Average
						Number				Grant Date
(Shares in thousands)						of Shares				Fair Value
Nonvested at July 31, 2009							9,398			$	27.06
Granted							994				29.92
Restricted stock granted related to business combinations							231				29.14
Vested							(1,973	)			29.39
Forfeited							(818	)			26.38
Nonvested at January 31, 2010							7,832			$	26.97