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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 January 31, 2017 |
OR
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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)
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| | |
Delaware (State of incorporation) | | 77-0034661 (IRS employer identification no.) |
| 2700 Coast Avenue, Mountain View, CA 94043 (Address of principal executive offices) | |
| | |
| (650) 944-6000 (Registrant’s telephone number, including area code) | |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 255,785,325 shares of Common Stock, $0.01 par value, were outstanding at February 17, 2017.
INTUIT INC.
FORM 10-Q
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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, 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.
PART I
ITEM 1
FINANCIAL STATEMENTS
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In millions, except per share amounts) | January 31,
2017 | | January 31,
2016 | | January 31,
2017 | | January 31,
2016 |
Net revenue: | | | | | | | |
Product | $ | 299 |
| | $ | 264 |
| | $ | 596 |
| | $ | 535 |
|
Service and other | 717 |
| | 659 |
| | 1,198 |
| | 1,101 |
|
Total net revenue | 1,016 |
| | 923 |
| | 1,794 |
| | 1,636 |
|
Costs and expenses: | | | | | | | |
Cost of revenue: | | | | | | | |
Cost of product revenue | 37 |
| | 40 |
| | 66 |
| | 69 |
|
Cost of service and other revenue | 166 |
| | 153 |
| | 317 |
| | 284 |
|
Amortization of acquired technology | 3 |
| | 6 |
| | 6 |
| | 12 |
|
Selling and marketing | 405 |
| | 356 |
| | 688 |
| | 600 |
|
Research and development | 243 |
| | 205 |
| | 489 |
| | 418 |
|
General and administrative | 140 |
| | 120 |
| | 266 |
| | 237 |
|
Amortization of other acquired intangible assets | — |
| | 1 |
| | 1 |
| | 3 |
|
Total costs and expenses | 994 |
| | 881 |
| | 1,833 |
| | 1,623 |
|
Operating income (loss) from continuing operations | 22 |
| | 42 |
| | (39 | ) | | 13 |
|
Interest expense | (11 | ) | | (9 | ) | | (20 | ) | | (16 | ) |
Interest and other income (expense), net | (1 | ) | | (5 | ) | | (3 | ) | | (9 | ) |
Income (loss) before income taxes | 10 |
| | 28 |
| | (62 | ) | | (12 | ) |
Income tax provision (benefit) | (3 | ) | | (1 | ) | | (45 | ) | | (10 | ) |
Net income (loss) from continuing operations | 13 |
| | 29 |
| | (17 | ) | | (2 | ) |
Net loss from discontinued operations | — |
| | (5 | ) | | — |
| | (5 | ) |
Net income (loss) | $ | 13 |
| | $ | 24 |
| | $ | (17 | ) | | $ | (7 | ) |
| | | | | | | |
Basic net income (loss) per share from continuing operations | $ | 0.05 |
| | $ | 0.11 |
| | $ | (0.07 | ) | | $ | (0.01 | ) |
Basic net loss per share from discontinued operations | — |
| | (0.02 | ) | | — |
| | (0.02 | ) |
Basic net income (loss) per share | $ | 0.05 |
| | $ | 0.09 |
| | $ | (0.07 | ) | | $ | (0.03 | ) |
Shares used in basic per share calculations | 257 |
| | 263 |
| | 257 |
| | 267 |
|
| | | | | | | |
Diluted net income (loss) per share from continuing operations | $ | 0.05 |
| | $ | 0.11 |
| | $ | (0.07 | ) | | $ | (0.01 | ) |
Diluted net loss per share from discontinued operations | — |
| | (0.02 | ) | | — |
| | (0.02 | ) |
Diluted net income (loss) per share | $ | 0.05 |
| | $ | 0.09 |
| | $ | (0.07 | ) | | $ | (0.03 | ) |
Shares used in diluted per share calculations | 260 |
| | 266 |
| | 257 |
| | 267 |
|
| | | | | | | |
Cash dividends declared per common share | $ | 0.34 |
| | $ | 0.30 |
| | $ | 0.68 |
| | $ | 0.60 |
|
See accompanying notes.
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In millions) | January 31,
2017 | | January 31,
2016 | | January 31,
2017 | | January 31,
2016 |
| | | | | | | |
Net income (loss) | $ | 13 |
| | $ | 24 |
| | $ | (17 | ) | | $ | (7 | ) |
Other comprehensive income (loss), net of income taxes: | | | | | | | |
Unrealized losses on available-for-sale debt securities | — |
| | — |
| | (1 | ) | | — |
|
Foreign currency translation gains (losses) | 3 |
| | (10 | ) | | (1 | ) | | (12 | ) |
Total other comprehensive income (loss), net | 3 |
| | (10 | ) | | (2 | ) | | (12 | ) |
Comprehensive income (loss) | $ | 16 |
| | $ | 14 |
| | $ | (19 | ) | | $ | (19 | ) |
See accompanying notes.
INTUIT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| | | | | | | |
(In millions) | January 31,
2017 | | July 31,
2016 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 392 |
| | $ | 638 |
|
Investments | 245 |
| | 442 |
|
Accounts receivable, net | 521 |
| | 108 |
|
Income taxes receivable | 41 |
| | 20 |
|
Prepaid expenses and other current assets | 156 |
| | 102 |
|
Current assets before funds held for customers | 1,355 |
| | 1,310 |
|
Funds held for customers | 324 |
| | 304 |
|
Total current assets | 1,679 |
| | 1,614 |
|
Long-term investments | 28 |
| | 28 |
|
Property and equipment, net | 1,047 |
| | 1,031 |
|
Goodwill | 1,293 |
| | 1,282 |
|
Acquired intangible assets, net | 34 |
| | 44 |
|
Long-term deferred income taxes | 172 |
| | 139 |
|
Other assets | 120 |
| | 112 |
|
Total assets | $ | 4,373 |
| | $ | 4,250 |
|
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Short-term debt | $ | 687 |
| | $ | 512 |
|
Accounts payable | 258 |
| | 184 |
|
Accrued compensation and related liabilities | 204 |
| | 289 |
|
Deferred revenue | 1,076 |
| | 801 |
|
Other current liabilities | 254 |
| | 161 |
|
Current liabilities before customer fund deposits | 2,479 |
| | 1,947 |
|
Customer fund deposits | 324 |
| | 304 |
|
Total current liabilities | 2,803 |
| | 2,251 |
|
Long-term debt | 463 |
| | 488 |
|
Long-term deferred revenue | 178 |
| | 204 |
|
Other long-term obligations | 144 |
| | 146 |
|
Total liabilities | 3,588 |
| | 3,089 |
|
Commitments and contingencies |
| |
|
Stockholders’ equity: | | | |
Preferred stock | — |
| | — |
|
Common stock and additional paid-in capital | 4,660 |
| | 4,445 |
|
Treasury stock, at cost | (10,329 | ) | | (9,939 | ) |
Accumulated other comprehensive loss | (34 | ) | | (32 | ) |
Retained earnings | 6,488 |
| | 6,687 |
|
Total stockholders’ equity | 785 |
| | 1,161 |
|
Total liabilities and stockholders’ equity | $ | 4,373 |
| | $ | 4,250 |
|
See accompanying notes.
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, 2016 | 257,853 |
| | $ | 4,445 |
| | $ | (9,939 | ) | | $ | (32 | ) | | $ | 6,687 |
| | $ | 1,161 |
|
Comprehensive income | — |
| | — |
| | — |
| | (2 | ) | | (17 | ) | | (19 | ) |
Issuance of stock under employee stock plans, net of shares withheld for employee taxes | 1,649 |
| | 35 |
| |
|
| | — |
| | — |
| | 35 |
|
Stock repurchases under stock repurchase programs | (3,500 | ) | | — |
| | (390 | ) | | — |
| | — |
| | (390 | ) |
Dividends and dividend rights declared ($0.68 per share) | — |
| | — |
| | — |
| | — |
| | (178 | ) | | (178 | ) |
Cumulative effect of change in accounting principle | — |
| | 6 |
| | — |
| | — |
| | (4 | ) | | 2 |
|
Share-based compensation expense | — |
| | 174 |
| | — |
| | — |
| | — |
| | 174 |
|
Balance at January 31, 2017 | 256,002 |
| | $ | 4,660 |
| | $ | (10,329 | ) | | $ | (34 | ) | | $ | 6,488 |
| | $ | 785 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
(In millions, except shares in thousands) | Shares of Common Stock | | Common Stock and Additional Paid-In Capital | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Stockholders' Equity |
Balance at July 31, 2015 | 277,706 |
| | $ | 4,010 |
| | $ | (7,675 | ) | | $ | (30 | ) | | $ | 6,027 |
| | $ | 2,332 |
|
Comprehensive loss | — |
| | — |
| | — |
| | (12 | ) | | (7 | ) | | (19 | ) |
Issuance of stock under employee stock plans, net of shares withheld for employee taxes | 1,901 |
| | 56 |
| | — |
| | — |
| | — |
| | 56 |
|
Stock repurchases under stock repurchase programs | (19,134 | ) | | — |
| | (1,725 | ) | | — |
| | — |
| | (1,725 | ) |
Dividends and dividend rights declared ($0.60 per share) | — |
| | — |
| | — |
| | — |
| | (163 | ) | | (163 | ) |
Tax benefit from share-based compensation plans | — |
| | 20 |
| | — |
| | — |
| | — |
| | 20 |
|
Share-based compensation expense | — |
| | 140 |
| | — |
| | — |
| | — |
| | 140 |
|
Balance at January 31, 2016 | 260,473 |
| | $ | 4,226 |
| | $ | (9,400 | ) | | $ | (42 | ) | | $ | 5,857 |
| | $ | 641 |
|
See accompanying notes.
INTUIT INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| Six Months Ended |
(In millions) | January 31,
2017 | | January 31,
2016 |
Cash flows from operating activities: | | | |
Net loss | $ | (17 | ) | | $ | (7 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation | 101 |
| | 94 |
|
Amortization of acquired intangible assets | 11 |
| | 19 |
|
Share-based compensation expense | 170 |
| | 137 |
|
Deferred income taxes | (31 | ) | | (11 | ) |
Tax benefit from share-based compensation plans | — |
| | 20 |
|
Other | 7 |
| | 10 |
|
Total adjustments | 258 |
| | 269 |
|
Changes in operating assets and liabilities: | | | |
Accounts receivable | (413 | ) | | (431 | ) |
Income taxes receivable | (21 | ) | | (26 | ) |
Prepaid expenses and other assets | (58 | ) | | (18 | ) |
Accounts payable | 93 |
| | 103 |
|
Accrued compensation and related liabilities | (83 | ) | | (100 | ) |
Deferred revenue | 250 |
| | 296 |
|
Other liabilities | 78 |
| | 43 |
|
Total changes in operating assets and liabilities | (154 | ) | | (133 | ) |
Net cash provided by operating activities | 87 |
| | 129 |
|
Cash flows from investing activities: | | | |
Purchases of corporate and customer fund investments | (201 | ) | | (181 | ) |
Sales of corporate and customer fund investments | 316 |
| | 942 |
|
Maturities of corporate and customer fund investments | 79 |
| | 126 |
|
Net change in cash and cash equivalents held to satisfy customer fund obligations | (20 | ) | | (35 | ) |
Net change in customer fund deposits | 20 |
| | 35 |
|
Purchases of property and equipment | (132 | ) | | (394 | ) |
Other | (19 | ) | | — |
|
Net cash provided by investing activities | 43 |
| | 493 |
|
Cash flows from financing activities: | | | |
Proceeds from borrowings under revolving credit facilities | 150 |
| | 745 |
|
Proceeds from issuance of stock under employee stock plans | 86 |
| | 85 |
|
Payments for employee taxes withheld upon vesting of restricted stock units | (51 | ) | | (29 | ) |
Cash paid for purchases of treasury stock | (383 | ) | | (1,725 | ) |
Dividends and dividend rights paid | (177 | ) | | (161 | ) |
Net cash used in financing activities | (375 | ) | | (1,085 | ) |
Effect of exchange rates on cash and cash equivalents | (1 | ) | | (11 | ) |
Net decrease in cash and cash equivalents | (246 | ) | | (474 | ) |
Cash and cash equivalents at beginning of period | 638 |
| | 808 |
|
Cash and cash equivalents at end of period | $ | 392 |
| | $ | 334 |
|
________________________________
During the first quarter of fiscal 2017, we elected to early adopt ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” See Note 1, “Description of Business and Summary of Significant Accounting Policies - Accounting Pronouncements Recently Adopted,” for more information.
Because the cash flows of our discontinued operations were not material for any period presented, we have not segregated the cash flows of those businesses on these statements of cash flows. See Note 4, “Discontinued Operations,” for more information.
See accompanying notes.
INTUIT INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
1. | Description of Business and Summary of Significant Accounting Policies |
Description of Business
Intuit Inc. provides business and financial management solutions for small businesses, consumers, and accounting professionals. With flagship products and services that include QuickBooks and TurboTax, we help customers solve important business and financial management problems such as running a small business, paying bills, and filing income taxes. ProSeries and Lacerte are Intuit’s tax preparation offerings for professional accountants. Incorporated in 1984 and headquartered in Mountain View, California, we sell our products and services primarily in the United States.
Basis of Presentation
These condensed consolidated financial statements include the financial statements of Intuit and its wholly owned subsidiaries. We have eliminated all significant intercompany balances and transactions in consolidation. We have included all adjustments, consisting only of normal recurring items, which we considered necessary for a fair presentation of our financial results for the interim periods presented. We have reclassified certain amounts previously reported in our financial statements to conform to the current presentation, including amounts related to discontinued operations and reportable segments. See Note 4, “Discontinued Operations,” and Note 10, “Segment Information,” for more information.
As discussed in Note 4, we sold our Demandforce, QuickBase, and Quicken businesses in the third quarter of fiscal 2016. We have reclassified our statements of operations for all periods presented to reflect these businesses as discontinued operations. Because the cash flows of these businesses were not material for any period presented, we have not segregated them on our statements of cash flows. Unless noted otherwise, discussions in these notes pertain to our continuing operations.
These unaudited condensed consolidated financial statements and accompanying notes should be read together with the audited consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2016. Results for the six months ended January 31, 2017 do not necessarily indicate the results we expect for the fiscal year ending July 31, 2017 or any other future period.
Seasonality
Our Consumer Tax offerings have significant seasonal patterns and revenue from those income tax preparation products and services is heavily concentrated in our third fiscal quarter ending April 30.
Significant Accounting Policies
We describe our significant accounting policies in Note 1 to the financial statements in Item 8 of our Annual Report on Form 10-K for the fiscal year ended July 31, 2016. There have been no changes to our significant accounting policies during the first six months of fiscal 2017.
Use of Estimates
In preparing our consolidated financial statements in accordance with U.S. generally accepted accounting principles (GAAP), we make certain estimates and assumptions that affect the amounts reported in our financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the appropriate levels of reserves for product returns and rebates, the collectibility of accounts receivable, the appropriate levels of various accruals including accruals for litigation contingencies, the amount of our worldwide tax provision, and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and fair values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Despite our intention to establish accurate estimates and use reasonable assumptions, actual results may differ from our estimates.
Computation of Net Income (Loss) Per Share
We compute basic net income or loss per share using the weighted average number of common shares outstanding during the period. We compute diluted net income per share using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the shares issuable upon the exercise of stock options and upon the vesting of restricted stock units (RSUs) under the treasury stock method.
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. Prior to our early adoption of ASU 2016-09 in the first quarter of fiscal 2017, we included tax benefits in assessing whether equity awards were dilutive and in our calculations of weighted average dilutive shares under the treasury stock method.
All of the RSUs we grant have dividend rights. Dividend rights are accumulated and paid when the underlying RSUs vest. Since the dividend rights are subject to the same vesting requirements as the underlying equity awards they are considered a contingent transfer of value. Consequently, the RSUs are not considered participating securities and we do not present them separately in earnings per share.
In loss periods, basic net loss per share and diluted net loss per share are the same since the effect of potential common shares is anti-dilutive and therefore excluded.
The following table presents the composition of shares used in the computation of basic and diluted net income (loss) per share for the periods indicated.
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(In millions, except per share amounts) | January 31,
2017 | | January 31,
2016 | | January 31,
2017 | | January 31,
2016 |
Numerator: | | | | | | | |
Net income (loss) from continuing operations | $ | 13 |
| | $ | 29 |
| | $ | (17 | ) | | $ | (2 | ) |
Net loss from discontinued operations | — |
| | (5 | ) | | — |
| | (5 | ) |
Net income (loss) | $ | 13 |
| | $ | 24 |
| | $ | (17 | ) | | $ | (7 | ) |
| | | | | | | |
Denominator: | | | | | | | |
Shares used in basic per share amounts: | | | | | | | |
Weighted average common shares outstanding | 257 |
| | 263 |
| | 257 |
| | 267 |
|
| | | | | | | |
Shares used in diluted per share amounts: | | | | | | | |
Weighted average common shares outstanding | 257 |
| | 263 |
| | 257 |
| | 267 |
|
Dilutive common equivalent shares from stock options | | | | | | | |
and restricted stock awards | 3 |
| | 3 |
| | — |
| | — |
|
Dilutive weighted average common shares outstanding | 260 |
| | 266 |
| | 257 |
| | 267 |
|
| | | | | | | |
Basic and diluted net income (loss) per share: | | | | | | | |
Basic net income (loss) per share from continuing operations | $ | 0.05 |
| | $ | 0.11 |
| | $ | (0.07 | ) | | $ | (0.01 | ) |
Basic net loss per share from discontinued operations | — |
| | (0.02 | ) | | — |
| | (0.02 | ) |
Basic net income (loss) per share | $ | 0.05 |
| | $ | 0.09 |
| | $ | (0.07 | ) | | $ | (0.03 | ) |
| | | | | | | |
Diluted net income (loss) per share from continuing operations | $ | 0.05 |
| | $ | 0.11 |
| | $ | (0.07 | ) | | $ | (0.01 | ) |
Diluted net loss per share from discontinued operations | — |
| | (0.02 | ) | | — |
| | (0.02 | ) |
Diluted net income (loss) per share | $ | 0.05 |
| | $ | 0.09 |
| | $ | (0.07 | ) | | $ | (0.03 | ) |
| | | | | | | |
Shares excluded from computation of diluted net income (loss) per share: | | | | | | | |
Weighted average stock options and restricted stock units that would have been included in the computation of dilutive common equivalent shares outstanding if net income had been reported in the period | — |
| | — |
| | 11 |
| | 13 |
|
| | | | | | | |
Weighted average stock options and restricted stock units excluded from computation due to anti-dilutive effect | 4 |
| | 2 |
| | 4 |
| | 2 |
|
Concentration of Credit Risk and Significant Customers
No customer accounted for 10% or more of total net revenue in the three or six months ended January 31, 2017 or January 31, 2016. Due to the seasonality of our consumer tax offerings, one retail customer accounted for 15% of gross accounts receivable at January 31, 2017. No customer accounted for 10% or more of gross accounts receivable at July 31, 2016.
Recent Accounting Pronouncements
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 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),” and in August 2015 the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year. This new standard supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the standard is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard 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 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 standard is effective for reporting periods beginning after December 15, 2017, which means that it will be effective for us in the first quarter of our fiscal year beginning August 1, 2018. Early adoption one year prior to the required effective date is permitted. The standard allows adoption using either of two methods: (i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients; or (ii) retrospective with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.
We do not expect that any other recently issued accounting pronouncements will have a significant effect on our financial statements.
Accounting Pronouncements Recently Adopted
Stock Compensation
In March 2016 the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” We elected to early adopt this standard in the first quarter of our fiscal year that began August 1, 2016. As required by ASU 2016-09, excess tax benefits recognized on stock-based compensation expense are reflected in our condensed consolidated statements of operations as a component of the provision for income taxes on a prospective basis. For the three and six months ended January 31, 2017, we recognized excess tax benefits of $7 million and $26 million in our provision of income taxes. As required by ASU 2016-09, excess tax benefits are classified as an operating activity in our condensed consolidated statements of cash flows and we have applied this provision on a retrospective basis. For the six months ended January 31, 2016, net cash provided by operating activities increased by $20 million with a corresponding offset to net cash used in financing activities. In addition, we have elected to account for forfeitures as they occur, rather than estimate expected forfeitures over the course of a vesting period. As a result of the adoption of ASU 2016-09, we recognized the net cumulative effect of this change as a $6 million increase to additional paid-in capital, a $2 million increase to deferred tax assets and a $4 million reduction to retained earnings as of August 1, 2016.
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2. | Fair Value Measurements |
The authoritative guidance defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, we consider the principal or most advantageous market for an asset or liability and assumptions that market participants would use when pricing the asset or liability. In addition, we consider and use all valuation methods that are appropriate in estimating the fair value of an asset or liability.
The authoritative guidance establishes a fair value hierarchy that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. In general, the authoritative guidance requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the measurement of its fair value. The three levels of input defined by the authoritative guidance are as follows:
| |
• | Level 1 uses unadjusted quoted prices that are available in active markets for identical assets or liabilities. |
| |
• | Level 2 uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices in active markets for similar assets or liabilities; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as |
interest rates and volatility, can be corroborated by readily observable market data for substantially the full term of the assets or liabilities.
| |
• | Level 3 uses one or more unobservable inputs that are supported by little or no market activity and that are significant to the determination of fair value. Level 3 assets and liabilities include those whose fair values are determined using pricing models, discounted cash flow methodologies or similar valuation techniques and significant management judgment or estimation. |
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.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 31, 2017 | | July 31, 2016 |
(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 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 416 |
| | $ | — |
| | $ | — |
| | $ | 416 |
|
Available-for-sale debt securities: | | | | | | | | | | | | | | | |
Municipal bonds | — |
| | 94 |
| | — |
| | 94 |
| | — |
| | 186 |
| | — |
| | 186 |
|
Corporate notes | — |
| | 349 |
| | — |
| | 349 |
| | — |
| | 420 |
| | — |
| | 420 |
|
U.S. agency securities | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 36 |
| | — |
| | 36 |
|
Municipal auction rate securities | — |
| | — |
| | 15 |
| | 15 |
| | — |
| | — |
| | 15 |
| | 15 |
|
Total available-for-sale securities | — |
| | 445 |
| | 15 |
| | 460 |
| | — |
| | 642 |
| | 15 |
| | 657 |
|
Total assets measured at fair value on a recurring basis | $ | — |
| | $ | 445 |
| | $ | 15 |
| | $ | 460 |
| | $ | 416 |
| | $ | 642 |
| | $ | 15 |
| | $ | 1,073 |
|
Liabilities: | | | | | | | | | | | | | | | |
Senior notes (1) | $ | — |
| | $ | 503 |
| | $ | — |
| | $ | 503 |
| | $ | — |
| | $ | 515 |
| | $ | — |
| | $ | 515 |
|
______________________________
| |
(1) | January 31, 2017 was $500 million and at July 31, 2016 was $500 million. See Note 5, “Current Liabilities – Short-Term Debt,” for more information. |
The following table summarizes our cash equivalents and available-for-sale debt securities by balance sheet classification and level in the fair value hierarchy at the dates indicated.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 31, 2017 | | July 31, 2016 |
(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 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 312 |
| | $ | — |
| | $ | — |
| | $ | 312 |
|
In funds held for customers | — |
| | — |
| | — |
| | — |
| | 104 |
| | — |
| | — |
| | 104 |
|
Total cash equivalents | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 416 |
| | $ | — |
| | $ | — |
| | $ | 416 |
|
Available-for-sale securities: | | | | | | | | | | | | | | | |
In investments | $ | — |
| | $ | 245 |
| | $ | — |
| | $ | 245 |
| | $ | — |
| | $ | 442 |
| | $ | — |
| | $ | 442 |
|
In funds held for customers | — |
| | 200 |
| | — |
| | 200 |
| | — |
| | 200 |
| | — |
| | 200 |
|
In long-term investments | — |
| | — |
| | 15 |
| | 15 |
| | — |
| | — |
| | 15 |
| | 15 |
|
Total available-for-sale securities | $ | — |
| | $ | 445 |
| | $ | 15 |
| | $ | 460 |
| | $ | — |
| | $ | 642 |
| | $ | 15 |
| | $ | 657 |
|
We value our Level 1 assets, consisting primarily of money market funds, using quoted prices in active markets for identical instruments. Financial assets whose fair values we measure on a recurring basis using Level 2 inputs consist of municipal bonds, corporate notes, and U.S. agency securities. We measure the fair values of these assets with the help of a pricing service
that either provides quoted market prices in active markets for identical or similar securities or uses observable inputs for their pricing without applying significant adjustments. Our fair value processes include controls that are designed to ensure that we record appropriate fair values for our Level 2 investments. These controls include comparison to pricing provided by a secondary pricing service or investment manager, validation of pricing sources and models, review of key model inputs, analysis of period-over-period price fluctuations, and independent recalculation of prices where appropriate.
Financial liabilities whose fair values we measure using Level 2 inputs consist of senior unsecured notes. See Note 5, “Current Liabilities – Short-Term Debt,” for more information. We measure the fair value of our senior notes based on their trading prices and the interest rates we could obtain for other borrowings with similar terms.
Financial assets whose fair values we measure using significant unobservable (Level 3) inputs consist of municipal auction rate securities that are no longer liquid. We estimate the fair values of the auction rate securities using a discounted cash flow model. We continue to classify them as long-term investments based on the maturities of the underlying securities at that date. We do not intend to sell our municipal auction rate securities. In addition, it is more likely than not that we will not be required to sell them before recovery at par, which may be at maturity.
There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the six months ended January 31, 2017.
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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. Cash equivalents consist primarily of AAA-rated money market funds in all periods presented. Investments at January 31, 2017 consisted of available-for-sale investment-grade debt securities that we carried at fair value. Funds held for customers consist of cash and cash equivalents and investment grade available-for-sale debt securities in all periods presented. Except for direct obligations of the United States government, securities issued by agencies of the United States government, and money market funds, we diversify our investments in debt securities by limiting our holdings with any individual issuer.
The following table summarizes our cash and cash equivalents, investments, and funds held for customers by balance sheet classification at the dates indicated.
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| | | | | | | | | | | | | | | |
| January 31, 2017 | | July 31, 2016 |
(In millions) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Classification on balance sheets: | | | | | | | |
Cash and cash equivalents | $ | 392 |
| | $ | 392 |
| | $ | 638 |
| | $ | 638 |
|
Investments | 246 |
| | 245 |
| | 441 |
| | 442 |
|
Funds held for customers | 324 |
| | 324 |
| | 304 |
| | 304 |
|
Long-term investments | 28 |
| | 28 |
| | 28 |
| | 28 |
|
Total cash and cash equivalents, investments, and funds held for customers | $ | 990 |
| | $ | 989 |
| | $ | 1,411 |
| | $ | 1,412 |
|
The following table summarizes our cash and cash equivalents, investments, and funds held for customers by investment category at the dates indicated.
|
| | | | | | | | | | | | | | | |
| January 31, 2017 | | July 31, 2016 |
(In millions) | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Type of issue: | | | | | | | |
Total cash and cash equivalents | $ | 516 |
| | $ | 516 |
| | $ | 742 |
| | $ | 742 |
|
Available-for-sale debt securities: | | | | | | | |
Municipal bonds | 94 |
| | 94 |
| | 186 |
| | 186 |
|
Corporate notes | 350 |
| | 349 |
| | 419 |
| | 420 |
|
U.S. agency securities | 2 |
| | 2 |
| | 36 |
| | 36 |
|
Municipal auction rate securities | 15 |
| | 15 |
| | 15 |
| | 15 |
|
Total available-for-sale debt securities | 461 |
| | 460 |
| | 656 |
| | 657 |
|
Other long-term investments | 13 |
| | 13 |
| | 13 |
| | 13 |
|
Total cash and cash equivalents, investments, and funds held for customers | $ | 990 |
| | $ | 989 |
| | $ | 1,411 |
| | $ | 1,412 |
|
We use the specific identification method to compute gains and losses on investments. We include realized gains and losses on our available-for-sale debt securities in interest and other income or expense, net in our statements of operations. Gross realized gains and losses on our available-for-sale debt securities for the six months ended January 31, 2017 and January 31, 2016 were not significant.
We accumulate unrealized gains and losses on our available-for-sale debt securities, net of tax, in accumulated other comprehensive income or loss in the stockholders’ equity section of our balance sheets. Gross unrealized gains and losses on our available-for-sale debt securities at January 31, 2017 and July 31, 2016 were not significant.
