Edgar Filing: INTUIT INC

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________

FORM 10-Q



þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended April 30, 2018



o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from ____________ to ____________ .

Commission File Number 0-21180

INTUIT INC.

(Exact name of registrant as specified in its charter)



Delaware (State of incorporation)		77-0034661 (IRS employer identification no.)
	2700 Coast Avenue, Mountain View, CA 94043 (Address of principal executive offices)

	(650) 944-6000 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):



Large accelerated filer	þ	Accelerated filer	o	Non-accelerated filer	o	Smaller reporting company	o	Emerging growth company	o
				(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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. 256,588,282 shares of Common Stock, $0.01 par value, were outstanding at May 16, 2018.

INTUIT INC.

FORM 10-Q

INDEX



	Page
PART I - FINANCIAL INFORMATION

ITEM 1: Financial Statements (Unaudited)

Condensed Consolidated Statements of Operations for the three and nine months ended April 30, 2018 and 2017	4

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended April 30, 2018 and 2017	5

Condensed Consolidated Balance Sheets at April 30, 2018 and July 31, 2017	6

Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended April 30, 2018 and 2017	7

Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2018 and 2017	8

Notes to Condensed Consolidated Financial Statements	9

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

ITEM 3: Quantitative and Qualitative Disclosures about Market Risk	35

ITEM 4: Controls and Procedures	36

PART II - OTHER INFORMATION

ITEM 1: Legal Proceedings	37

ITEM 1A: Risk Factors	37

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds	48

ITEM 6: Exhibits	48

Signatures	49

EX-31.01
EX-31.02
EX-32.01
EX-32.02
EX-101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
EX-101.SCH XBRL Taxonomy Extension Schema
EX-101.CAL XBRL Taxonomy Extension Calculation Linkbase
EX-101.LAB XBRL Taxonomy Extension Label Linkbase
EX-101.PRE XBRL Taxonomy Extension Presentation Linkbase
EX-101.DEF XBRL Taxonomy Extension Definition Linkbase

Intuit, the Intuit logo, QuickBooks, TurboTax, Intuit ProConnect, Lacerte, ProSeries, and Mint, among others, are registered trademarks and/or registered service marks of Intuit Inc., or one of its subsidiaries, in the United States and other countries. Other parties’ marks are the property of their respective owners.




	Intuit Q3 Fiscal 2018 Form 10-Q	2

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements in this report, other than statements that are purely historical, are forward-looking statements. Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “forecast,” “estimate,” “seek,” and similar expressions also identify forward-looking statements. In this report, forward-looking statements include, without limitation, the following:


•	our expectations and beliefs regarding future conduct and growth of the business;


•	our 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 regarding the impact of newly passed U.S. legislation on Intuit's business and its corporate tax rate;


•	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 be able to protect our customers’ data and prevent third parties from using stolen customer information to perpetrate fraud in our tax and other offerings;


•	our expectation that we will generate significant cash from operations;


•	our expectation that connected services 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 estimates regarding promotional and return reserves; the collectability of accounts receivable; stock volatility and other assumptions used to estimate the fair value of share-based compensation; the fair value of goodwill; and expected future amortization of acquired intangible assets;


•	our plans with respect to the adoption of Topic 606, including the adoption timing and methodology, as well our expectations and beliefs with respect to its impact on our revenue growth rates and on the timing of our quarterly revenue recognition;


•	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 expectation that we will pay approximately $320 million in income taxes in the fourth quarter of fiscal 2018;


•	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 intent to permanently reinvest a significant portion of our earnings from foreign operations, and our belief that we will not need funds generated from foreign operations to fund our domestic operations;


•	our belief that our cash and cash equivalents, investments and cash generated from operations will be sufficient to meet our seasonal working capital needs, capital expenditure requirements, contractual obligations, 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 belief that the credit facility will be available to us should we choose to borrow under it; and


•	our assessments and beliefs regarding the future outcome of pending legal proceedings and inquiries by regulatory authorities, the liability, if any, that Intuit may incur as a result of those proceedings and inquiries, and the impact of any potential losses associated with such proceedings or inquiries on our financial statements.

We caution investors that forward-looking statements are only predictions based on our current expectations about future events and are not guarantees of future performance. We encourage you to read carefully all information provided in this Quarterly Report and in our other filings with the Securities and Exchange Commission before deciding to invest in our stock or to maintain or change your investment. These forward-looking statements are based on information as of the filing date of this Quarterly Report, and we undertake no obligation to revise or update any forward-looking statement for any reason.




	Intuit Q3 Fiscal 2018 Form 10-Q	3

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS



INTUIT INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

	Three Months Ended						Nine Months Ended
(In millions, except per share amounts)	April 30, 2018			April 30, 2017			April 30, 2018			April 30, 2017
Net revenue:
Product	$	505		$	467		$	1,140		$	1,063
Service and other	2,420			2,074			3,836			3,272
Total net revenue	2,925			2,541			4,976			4,335
Costs and expenses:
Cost of revenue:
Cost of product revenue	27			29			87			95
Cost of service and other revenue	272			205			649			522
Amortization of acquired technology	5			3			10			9
Selling and marketing	549			467			1,326			1,155
Research and development	296			246			875			735
General and administrative	159			146			447			412
Amortization of other acquired intangible assets	2			1			4			2
Total costs and expenses	1,310			1,097			3,398			2,930
Operating income	1,615			1,444			1,578			1,405
Interest expense	(5		)	(8		)	(16		)	(28		)
Interest and other income, net	7			3			15			—
Income before income taxes	1,617			1,439			1,577			1,377
Income tax provision	417			475			415			430
Net income	$	1,200		$	964		$	1,162		$	947

Basic net income per share	$	4.68		$	3.76		$	4.54		$	3.68
Shares used in basic per share calculations	257			256			256			257

Diluted net income per share	$	4.59		$	3.70		$	4.47		$	3.63
Shares used in diluted per share calculations	262			260			260			261

Cash dividends declared per common share	$	0.39		$	0.34		$	1.17		$	1.02

See accompanying notes.




	Intuit Q3 Fiscal 2018 Form 10-Q	4

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

	Three Months Ended						Nine Months Ended
(In millions)	April 30, 2018			April 30, 2017			April 30, 2018			April 30, 2017

Net income	$	1,200		$	964		$	1,162		$	947
Other comprehensive income (loss), net of income taxes:
Unrealized gain (loss) on available-for-sale debt securities	(1		)	—			(2		)	(1		)
Foreign currency translation gain (loss)	(9		)	(2		)	(6		)	(3		)
Total other comprehensive income (loss), net	(10		)	(2		)	(8		)	(4		)
Comprehensive income	$	1,190		$	962		$	1,154		$	943

See accompanying notes.




	Intuit Q3 Fiscal 2018 Form 10-Q	5

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INTUIT INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(In millions)	April 30, 2018			July 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	1,614		$	529
Investments	322			248
Accounts receivable, net	309			103
Income taxes receivable	2			63
Prepaid expenses and other current assets	179			100
Current assets before funds held for customers	2,426			1,043
Funds held for customers	419			372
Total current assets	2,845			1,415
Long-term investments	28			31
Property and equipment, net	950			1,030
Goodwill	1,613			1,295
Acquired intangible assets, net	68			22
Long-term deferred income taxes	128			132
Other assets	155			143
Total assets	$	5,787		$	4,068

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	50		$	50
Accounts payable	325			157
Accrued compensation and related liabilities	286			300
Deferred revenue	1,040			887
Income taxes payable	356			5
Other current liabilities	227			173
Current liabilities before customer fund deposits	2,284			1,572
Customer fund deposits	419			372
Total current liabilities	2,703			1,944
Long-term debt	400			438
Long-term deferred revenue	173			202
Other long-term obligations	147			130
Total liabilities	3,423			2,714
Commitments and contingencies
Stockholders’ equity:
Preferred stock	—			—
Common stock and additional paid-in capital	5,289			4,857
Treasury stock, at cost	(11,050		)	(10,778		)
Accumulated other comprehensive loss	(30		)	(22		)
Retained earnings	8,155			7,297
Total stockholders’ equity	2,364			1,354
Total liabilities and stockholders’ equity	$	5,787		$	4,068

See accompanying notes.




	Intuit Q3 Fiscal 2018 Form 10-Q	6

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INTUIT INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

(In millions, except shares in thousands)	Shares of Common Stock		Common Stock and Additional Paid-In Capital		Treasury Stock			Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders' Equity
Balance at July 31, 2017	255,668		$	4,857	$	(10,778	)	$	(22	)	$	7,297		$	1,354
Comprehensive income	—		—		—			(8		)	1,162			1,154
Issuance of stock under employee stock plans, net of shares withheld for employee taxes	2,776		147					—			—			147
Stock repurchases under stock repurchase programs	(1,870	)	—		(272		)	—			—			(272		)
Dividends and dividend rights declared ($1.17 per share)	—		—		—			—			(304		)	(304		)
Share-based compensation expense	—		285		—			—			—			285
Balance at April 30, 2018	256,574		$	5,289	$	(11,050	)	$	(30	)	$	8,155		$	2,364



(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, 2016	257,853		$	4,445	$	(9,939	)	$	(32	)	$	6,687		$	1,161
Comprehensive income	—		—		—			(4		)	947			943
Issuance of stock under employee stock plans, net of shares withheld for employee taxes	2,642		89		—			—			—			89
Stock repurchases under stock repurchase programs	(4,241	)	—		(478		)	—			—			(478		)
Dividends and dividend rights declared ($1.02 per share)	—		—		—			—			(267		)	(267		)
Cumulative effect of change in accounting principle	—		6		—			—			(4		)	2
Share-based compensation expense	—		247		—			—			—			247
Balance at April 30, 2017	256,254		$	4,787	$	(10,417	)	$	(36	)	$	7,363		$	1,697

See accompanying notes.




	Intuit Q3 Fiscal 2018 Form 10-Q	7

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INTUIT INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Nine Months Ended
(In millions)	April 30, 2018			April 30, 2017
Cash flows from operating activities:
Net income	$	1,162		$	947
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	173			156
Amortization of acquired intangible assets	18			18
Share-based compensation expense	283			241
Deferred income taxes	24			(36		)
Other	(1		)	9
Total adjustments	497			388
Changes in operating assets and liabilities:
Accounts receivable	(206		)	(138		)
Income taxes receivable	62			19
Prepaid expenses and other assets	(37		)	5
Accounts payable	160			104
Accrued compensation and related liabilities	(8		)	(47		)
Deferred revenue	120			130
Income taxes payable	351			431
Other liabilities	48			50
Total changes in operating assets and liabilities	490			554
Net cash provided by operating activities	2,149			1,889
Cash flows from investing activities:
Purchases of corporate and customer fund investments	(303		)	(286		)
Sales of corporate and customer fund investments	87			332
Maturities of corporate and customer fund investments	137			150
Net change in cash and cash equivalents held to satisfy customer fund obligations	(47		)	(18		)
Net change in customer fund deposits	47			18
Purchases of property and equipment	(97		)	(178		)
Acquisitions of businesses, net of cash acquired	(363		)	—
Other	(49		)	(40		)
Net cash used in investing activities	(588		)	(22		)
Cash flows from financing activities:
Proceeds from borrowings under revolving credit facility	800			150
Repayments on borrowings under revolving credit facility	(800		)	(150		)
Repayment of debt	(38		)	(500		)
Proceeds from issuance of stock under employee stock plans	205			150
Payments for employee taxes withheld upon vesting of restricted stock units	(58		)	(61		)
Cash paid for purchases of treasury stock	(272		)	(473		)
Dividends and dividend rights paid	(305		)	(265		)
Other	(1		)	—
Net cash used in financing activities	(469		)	(1,149		)
Effect of exchange rates on cash and cash equivalents	(7		)	(6		)
Net increase in cash and cash equivalents	1,085			712
Cash and cash equivalents at beginning of period	529			638
Cash and cash equivalents at end of period	$	1,614		$	1,350

See accompanying notes.




	Intuit Q3 Fiscal 2018 Form 10-Q	8

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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 reach small business customers.

Our flagship brands, QuickBooks and TurboTax, help customers run their small businesses, pay employees and bills, 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. See Note 10, “Segment Information,” for more information.

As discussed in Note 4, we acquired TSheets.com LLC, Exactor, Inc., and Applatix, Inc. in the second quarter of fiscal 2018. We have included the results of operations for these companies in our consolidated results of operations from the dates of acquisition. See Note 4, “Business Combinations,” for more information.

These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2017. Results for the nine months ended April 30, 2018 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2018 or any other future period.

Seasonality

Our Consumer offerings have significant seasonal patterns and revenue from those income tax preparation products and services is heavily concentrated in our third fiscal quarter ending April 30.

Significant Accounting Policies

We describe our significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2017. There have been no changes to our significant accounting policies during the first nine months of fiscal 2018.

Use of Estimates

In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP), we make certain estimates and assumptions that affect the amounts reported in our financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the appropriate levels of reserves for product returns, promotional discounts and rebates, the collectibility of accounts receivable, the appropriate levels of various accruals including accruals for litigation contingencies, the amount of our worldwide tax provision, and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and fair values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.




	Intuit Q3 Fiscal 2018 Form 10-Q	9

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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.

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				Nine Months Ended
(In millions, except per share amounts)	April 30, 2018		April 30, 2017		April 30, 2018		April 30, 2017
Numerator:
Net income	$	1,200	$	964	$	1,162	$	947

Denominator:
Shares used in basic per share amounts:
Weighted average common shares outstanding	257		256		256		257

Shares used in diluted per share amounts:
Weighted average common shares outstanding	257		256		256		257
Dilutive common equivalent shares from stock options
and restricted stock awards	5		4		4		4
Dilutive weighted average common shares outstanding	262		260		260		261

Basic and diluted net income per share:
Basic net income per share	$	4.68	$	3.76	$	4.54	$	3.68

Diluted net income per share	$	4.59	$	3.70	$	4.47	$	3.63

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	—		3		2		4

Concentration of Credit Risk and Significant Customers

No customer accounted for 10% or more of total net revenue in the three or nine months ended April 30, 2018 or April 30, 2017. No customer accounted for 10% or more of gross accounts receivable at April 30, 2018 or July 31, 2017.

Accounting Standards Not Yet Adopted

Goodwill Impairment - In January 2017 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This new 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




	Intuit Q3 Fiscal 2018 Form 10-Q	10

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reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2020. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2017-04 on our consolidated financial statements.

Business Combinations - In January 2017 the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” This new standard clarifies the definition of a business in order to allow for the evaluation of whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2018. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2017-01 on our consolidated financial statements.

Statement of Cash Flows - In August 2016 the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2018. The standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case we would be required to apply the amendments prospectively as of the earliest date practicable. We are currently evaluating the impact of our pending adoption of ASU 2016-15 on our consolidated financial statements.

Financial Instruments - In June 2016 the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326).” This new standard requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2020. Earlier adoption is permitted in the first quarter of our fiscal year beginning August 1, 2019. We are currently evaluating the impact of our pending adoption of ASU 2016-13 on our consolidated financial statements.

Leases - In February 2016 the FASB issued ASU 2016-02, “Leases (Topic 842).” This new standard amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2019. Early adoption is permitted. This standard is required to be adopted using a modified retrospective approach. We are currently evaluating the impact of our pending adoption of ASU 2016-02 on our consolidated financial statements.

Revenue Recognition - In May 2014 the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This new standard supersedes nearly all existing revenue recognition guidance under U.S. GAAP. Under the new standard, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than is required under present U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The new standard is effective for reporting periods beginning after December 15, 2017, which means that it is effective for us beginning August 1, 2018.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with the cumulative effect of applying the guidance recognized in retained earnings as of the date of adoption (modified retrospective method). We plan to adopt Topic 606 utilizing the full retrospective transition method when it becomes effective for us in the first fiscal quarter beginning August 1, 2018. In preparation for adoption of the standard, we have implemented internal controls and processes and key system functionality needed to enable the preparation of financial information and have reached conclusions on key accounting assessments related to the standard.

The most significant impact of the standard relates to the timing and amount of revenue recognized for our QuickBooks Desktop solutions and our consumer and professional tax desktop solutions. Our QuickBooks Desktop solutions include both packaged software products and software subscriptions.

Our QuickBooks Desktop packaged software products include a software license as well as enhancements and connected services. Under the current standard, we recognize revenue for the QuickBooks Desktop packaged software products ratably over the period that enhancements and connected services are provided, which is approximately three years. Under the new standard, we will recognize revenue for our QuickBooks Desktop packaged software products at the time the software license is delivered. We have determined that the enhancements and connected services included in our QuickBooks Desktop packaged software product are immaterial within the context of the contract.

Our QuickBooks Desktop software subscriptions include a software license, version protection, enhancements, support and various connected services. Under the current standard, we recognize revenue for our QuickBooks Desktop software subscriptions ratably over the subscription term, which is generally one year. Under the new standard, we will recognize revenue for the software license and version protection at the time they are delivered and will recognize revenue for support




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and connected services over the subscription term as the services are provided. We have determined that the enhancements included in our QuickBooks Desktop software subscriptions are immaterial within the context of the contract.

We expect the timing of the revenue for our QuickBooks Desktop solutions, which are included in our Small Business & Self-Employed reporting segment, to shift to earlier quarters within each fiscal year as a result of these changes.

With respect to our consumer and professional tax desktop solutions, under the current standard, we recognize all revenue related to the desktop solutions as services are provided. Under the new standard, we will recognize revenue for the desktop tax preparation software license and related tax form updates as they are delivered. We will recognize revenue for our electronic filing and connected services as those services are provided. As sales and delivery of desktop tax preparation software solutions are concentrated from November through April, we expect the timing of the related desktop revenue for our Consumer and Strategic Partner reporting segments to shift to earlier quarters within each fiscal year as a result of these changes.

Due to the upfront recognition of our QuickBooks Desktop solutions and the shift in timing related to the desktop revenue for our Consumer and Strategic Partner segments, upon adoption, we will remove a portion of our deferred revenue from our liabilities through a cumulative adjustment to retained earnings.

Under Topic 606 we do not expect our annual total and reporting segment revenue growth rates to be significantly different as compared to growth rates under the current standard.

Under the new standard, we are required to recognize an asset for the incremental costs of obtaining a contract with a customer if we expect the benefit of those costs to be longer than one year. We have determined that certain sales commissions meet the requirements to be capitalized. The total capitalized costs to obtain a contact will be included in prepaid expenses and other current assets and other assets on our consolidated balance sheets upon adoption. We do not expect the deferral of incremental commission costs to be material.

We do not expect that any other recently issued accounting pronouncements will have a significant effect on our 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.



	April 30, 2018								July 31, 2017
(In millions)	Level 1		Level 2		Level 3		Total Fair Value		Level 1		Level 2		Level 3		Total Fair Value
Assets:
Cash equivalents, primarily money market funds and savings deposit accounts	$	1,288	$	—	$	—	$	1,288	$	181	$	—	$	—	$	181
Time deposits	—		75		—		75		—		—		—		—
Available-for-sale debt securities:
Municipal bonds	—		46		—		46		—		63		—		63
Corporate notes	—		394		—		394		—		382		—		382
U.S. agency securities	—		7		—		7		—		3		—		3
Municipal auction rate securities	—		—		15		15		—		—		15		15
Total available-for-sale securities	—		447		15		462		—		448		15		463
Total assets measured at fair value on a recurring basis	$	1,288	$	522	$	15	$	1,825	$	181	$	448	$	15	$	644

The following table summarizes our cash equivalents, time deposits, and available-for-sale debt securities by balance sheet classification and level in the fair value hierarchy at the dates indicated.



	April 30, 2018								July 31, 2017
(In millions)	Level 1		Level 2		Level 3		Total Fair Value		Level 1		Level 2		Level 3		Total Fair Value
Cash equivalents:
In cash and cash equivalents	$	1,288	$	—	$	—	$	1,288	$	181	$	—	$	—	$	181
Time deposits:
In investments	$	—	$	75	$	—	$	75	$	—	$	—	$	—	$	—
Available-for-sale debt securities:
In investments	$	—	$	247	$	—	$	247	$	—	$	248	$	—	$	248
In funds held for customers	—		200		—		200		—		200		—		200
In long-term investments	—		—		15		15		—		—		15		15
Total available-for-sale debt securities	$	—	$	447	$	15	$	462	$	—	$	448	$	15	$	463

We value our Level 1 assets, consisting primarily of money market funds and savings deposit accounts, 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, U.S. agency securities, and time deposits. 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 significant unobservable (Level 3) inputs consist of municipal auction rate securities that are no longer liquid. We estimate the fair values of the auction rate securities using a discounted cash flow model. We continue to classify them as long-term investments based on the maturities of the underlying securities at that date. We do not intend to sell our municipal auction rate securities. In addition, it is more likely than not that we will not be required to sell them before recovery at par, which may be at maturity.

There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the nine months ended April 30, 2018.




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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 primarily consist of money market funds and savings deposit accounts, investments consist of available-for-sale investment-grade debt securities and time deposits, and funds held for customers consist of cash and cash equivalents and investment grade available-for-sale debt securities. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market funds, we diversify our investments in debt securities by limiting our holdings with any individual issuer.

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



	April 30, 2018				July 31, 2017
(In millions)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Classification on balance sheets:
Cash and cash equivalents	$	1,614	$	1,614	$	529	$	529
Investments	325		322		247		248
Funds held for customers	419		419		372		372
Long-term investments	28		28		31		31
Total cash and cash equivalents, investments, and funds held for customers	$	2,386	$	2,383	$	1,179	$	1,180

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

April 30, 2018

July 31, 2017

(In millions)

Amortized

Cost

Fair Value

Amortized

Cost

Fair Value

Type of issue:

Total cash and cash equivalents

1,833