Intuit Inc. — FY2012 Form 10-K
Business context and reporting period. Intuit provides financial and business software and services, including QuickBooks, TurboTax, Quicken, and digital banking solutions. This report covers the fiscal year ended July 31, 2012; figures are in U.S. dollars. Its business is highly seasonal, with tax-related revenue concentrated in the second and third fiscal quarters. Connected services generated 64% of FY2012 revenue, including about 40% from software-as-a-service offerings.
Financial results and liquidity
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $4.151 billion | $3.772 billion | +10% |
| Operating income, continuing operations | $1.177 billion | $1.037 billion | +14% |
| Net income, continuing operations | $767 million | $652 million | +18% |
| Diluted EPS, continuing operations | $2.52 | $2.06 | +22% |
| Net income, including discontinued operations | $792 million | $634 million | |
| Operating cash flow | $1.246 billion | $1.013 billion |
Calculated operating margin was approximately 28.4%, versus 27.5% in FY2011. Cost of revenue was $760 million, or 18% of revenue, compared with $650 million, or 17%, in FY2011. The effective tax rate was approximately 33% versus 35%.
Cash, cash equivalents, and current investments totaled $744 million at year-end, down $677 million from FY2011; working capital was $258 million and the current ratio was 1.2:1. Long-term debt was $499 million: Intuit repaid $500 million of notes due in March 2012, leaving $500 million principal due in 2017. A $500 million revolving credit facility was undrawn. The company reported no significant off-balance-sheet arrangements.
FY2012 financing cash use was $1.344 billion, including $900 million of share repurchases, $500 million of debt repayment, and $178 million of dividends, partly offset by $164 million from employee stock plans. Capital expenditures were $186 million. The company stated that cash, investments, and expected operating cash flow should cover anticipated needs for at least 12 months.
Material changes versus the prior year
- Small Business Group revenue rose 14%. Payment Solutions grew 20%, Employee Management Solutions 12%, and Financial Management Solutions 11%.
- Consumer Tax revenue increased 11%, reflecting 6% growth in paid federal units and favorable product mix. Accounting Professionals rose 6%; Financial Services rose 5% reported, or 9% excluding its corporate banking business sale.
- Operating expenses increased, notably from higher staffing and share-based compensation, but declined to 53% of revenue from 55%. FY2011 included a $30 million Intuit Health impairment charge; none was recorded in FY2012.
- Demandforce was acquired in May 2012 for approximately $449 million in cash and other consideration, including assumed awards. Cash and investments declined amid the acquisition, debt repayment, dividends, and repurchases.
- FY2012 diluted weighted-average shares fell to 305 million from 317 million, contributing to EPS growth.
For the July 2012 quarter, revenue was $651 million versus $573 million; operating loss from continuing operations was $45 million versus $58 million, and continuing-operations net loss was $32 million versus $56 million. Reported net income was $4 million, including $36 million of discontinued-operations income.
Outlook, risks, contingencies, and unusual items
Management gave no specific numerical revenue or earnings guidance in the provided filing text. It expected seasonality to continue, anticipated comparable quarterly dividends subject to Board approval, and said it expected to return excess cash through repurchases and dividends. Intuit Websites was classified as discontinued operations; a sale agreement was signed after year-end, with completion expected in FY2013 and no loss expected. FY2012 discontinued-operations income included an $11 million loss from Websites offset by $36 million of tax benefits related to the anticipated sale.
- Competition and execution: Intuit highlighted intense competition, including free or low-priced online tax, accounting, payment, and banking services. Growth also depends on successful product innovation and migration to online and mobile services.
- Technology, privacy, and operations: Service interruptions, data-center migration, cybersecurity breaches, fraud, and third-party vendor failures could harm customers, reputation, and results. The company noted that some critical applications lacked full redundancy and that it did not maintain real-time backups of all data.
- Regulatory and legal exposure: Tax, payroll, payment, financial-services, privacy, and healthcare rules may increase compliance costs or constrain offerings. Two TurboTax refund-processing-fee class actions sought unspecified damages. Intuit recorded no accrual because loss was considered possible, not probable, and the range could not be reasonably estimated; the federal Smith complaint was dismissed in September 2012, while the related state case was stayed.
- Other financial risks: $41 million of municipal auction-rate securities remained illiquid, though management did not expect a material liquidity impact. Goodwill was $2.2 billion and net acquired intangible assets were $213 million; impairment remains a risk. Contractual obligations totaled $1.497 billion, including $500 million of notes and $427 million of operating leases.
The independent auditor issued an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective as of July 31, 2012.
Most important facts for investors to verify
- Whether growth in online, mobile, and subscription services continues and supports margins, particularly given higher service costs and competitive pricing.
- Demandforce’s post-acquisition contribution and the realization of expected strategic benefits relative to its approximately $449 million purchase consideration.
- Cash generation and capital allocation after the $677 million year-over-year decline in cash, cash equivalents, and current investments; also monitor repurchases and dividends.
- Progress and final terms of the Intuit Websites sale, including the discontinued-operations tax benefit and any subsequent adjustment.
- Developments in the TurboTax fee litigation, privacy/security risks, data-center migration, and the $500 million debt maturity in 2017.