NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation and Significant Accounting Policies
Recent Corporate Name Change
In connection with the sale of certain assets of our Enterprise Security business as disclosed in Basis of presentation below, effective November 4, 2019, we changed our corporate name from Symantec Corporation to NortonLifeLock Inc.
Basis of presentation
On August 8, 2019, we entered into a definitive agreement with Broadcom Inc. (Broadcom) under which Broadcom agreed to purchase certain of our Enterprise Security assets and assume certain liabilities for a purchase price of $10.7 billion (the Broadcom sale). On November 4, 2019, we completed the transaction. The divestiture of our Enterprise Security business allows us to shift our operational focus to our consumer business and represents a strategic shift in our operations. As a result, the majority of results of our Enterprise Security business were classified as discontinued operations in our Condensed Consolidated Statements of Operations and thus excluded from both continuing operations and segment results for all periods presented. Starting in the second quarter of fiscal 2020, we operate in one reportable segment. The Enterprise Security business was part of our Enterprise Security segment. Results of discontinued operations include all revenues and expenses directly derived from the Enterprise Security business, with the exception of revenues and associated costs of our ID Analytics solutions, which were formerly included in the Enterprise Security segment, and general corporate overhead which were previously allocated to the Enterprise Security segment but are not allocated to discontinued operations. These revenues and expenses are now included in continuing operations. The assets acquired and liabilities to be sold to Broadcom, as specified in the August 8, 2019 definitive agreement, were classified as discontinued operations in our Condensed Consolidated Balance Sheets, subject to changes set forth in the agreement. See Notes 3 and 18 for additional information about the divestiture of our Enterprise Security business.
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America (U.S.) for interim financial information. In the opinion of management, the unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting only of normal recurring items, except as otherwise noted, necessary for the fair presentation of our financial position, results of operations, and cash flows for the interim periods. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 29, 2019. The results of operations for the six months ended October 4, 2019 are not necessarily indicative of the results expected for the entire fiscal year.
We have a 52/53-week fiscal year ending on the Friday closest to March 31. Unless otherwise stated, references to three and six-month periods in this report relate to fiscal periods ended October 4, 2019 and September 28, 2018. The three and six months ended October 4, 2019 consisted of 13 and 27 weeks, respectively, whereas the three and six months ended September 28, 2018 consisted of 13 and 26 weeks, respectively. Our 2020 fiscal year consists of 53 weeks and ends on April 3, 2020.
Use of estimates
The preparation of Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Such estimates include, but are not limited to, the determination of stand-alone selling price for performance obligations, valuation of business combinations including acquired intangible assets and goodwill, loss contingencies, valuation of stock-based compensation, and the recognition and measurement of current and deferred income taxes, including the measurement of uncertain tax positions. Management determines these estimates and assumptions based on historical experience and on various other assumptions that are believed to be reasonable. Actual results could differ significantly from these estimates, and such differences may be material to the Condensed Consolidated Financial Statements.
Significant accounting policies
There have been no material changes to our significant accounting policies as of and for the six months ended October 4, 2019, except for those noted in Note 2 and Note 5, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended March 29, 2019.
Note 2. Recent Accounting Standards
Recently adopted authoritative guidance
Leases. In February 2016, the Financial Accounting Standards Board (FASB) issued new guidance on lease accounting which requires lessees to recognize assets and liabilities on their balance sheet for the rights and obligations created by operating leases and also requires disclosures designed to give users of financial statements information on the amount, timing, and uncertainty of cash flows arising from leases. Most prominent among the changes in the standard is the recognition of right-of-use (ROU) assets and lease liabilities by lessees for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
On March 30, 2019, the first day of our fiscal 2020, we adopted the new guidance using the alternative modified retrospective transition method under which we continue to apply the legacy lease accounting guidance, including its disclosure requirements, in comparative periods prior to fiscal 2020. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard that allowed us not to reassess (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. We currently do not have any finance leases. We combine the lease and non-lease components in determining the operating lease assets and liabilities.
The adoption of the new lease accounting standard resulted in the recognition of ROU assets and lease liabilities of $182 million and $209 million, respectively, as of March 30, 2019 related to our operating leases. The adoption of the standard also resulted in elimination of deferred rent liabilities of $17 million, as of March 30, 2019, which are now recorded as a reduction of the ROU assets. The standard did not have an impact on our consolidated statements of operations or statements of cash flows.
Recently issued authoritative guidance not yet adopted
Credit Losses. In June 2016, the FASB issued new authoritative guidance on credit losses which changes the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, we will be required to use a new forward-looking “expected loss” model. Additionally, for available-for-sale debt securities with unrealized losses, we will measure credit losses in a manner similar to today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard will be effective for us in our first quarter of fiscal 2021. We are currently evaluating the impact of the adoption of this guidance on our Consolidated Financial Statements.
Internal-Use Software. In August 2018, the FASB issued new guidance that clarifies the accounting for implementation costs in a cloud computing arrangement. The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard will be effective for us in our first quarter of fiscal 2021, with early adoption permitted. We are currently evaluating the adoption date and the impact of the adoption of this guidance on our Consolidated Financial Statements and disclosures.
Although there are several other new accounting pronouncements issued or proposed by the FASB that we have adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements has had, or will have, a material impact on our consolidated financial position, operating results or disclosures.
Note 3. Discontinued Operations
On August 8, 2019, we entered into a definitive agreement with Broadcom under which Broadcom agreed to purchase certain of our Enterprise Security assets and assume certain liabilities for a purchase price of $10.7 billion.
The following table presents the aggregate carrying amounts of the classes of assets and liabilities sold under the definitive agreement with Broadcom:
|
|
|
|
|
|
|
|
|
(In millions)
|
October 4, 2019
|
|
March 29, 2019
|
Assets:
|
|
|
|
Current assets
|
$
|
147
|
|
|
$
|
149
|
|
Intangible assets, net
|
934
|
|
|
1,048
|
|
Goodwill
|
5,772
|
|
|
5,773
|
|
Other long-term assets
|
194
|
|
|
171
|
|
Total assets of discontinued operations
|
$
|
7,047
|
|
|
$
|
7,141
|
|
Liabilities:
|
|
|
|
Current contract liabilities
|
$
|
1,224
|
|
|
$
|
1,288
|
|
Other current liabilities
|
22
|
|
|
9
|
|
Long-term contract liabilities
|
671
|
|
|
709
|
|
Other long-term liabilities
|
15
|
|
|
4
|
|
Total liabilities of discontinued operations
|
$
|
1,932
|
|
|
$
|
2,010
|
|
The following table presents information regarding certain components of income from discontinued operations, net of income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Net revenues
|
$
|
576
|
|
|
$
|
567
|
|
|
$
|
1,173
|
|
|
$
|
1,116
|
|
Operating income
|
$
|
113
|
|
|
$
|
63
|
|
|
$
|
136
|
|
|
$
|
99
|
|
Income before income taxes
|
$
|
113
|
|
|
$
|
63
|
|
|
$
|
137
|
|
|
$
|
95
|
|
Income tax expense (benefit)
|
$
|
(637
|
)
|
|
$
|
9
|
|
|
$
|
(604
|
)
|
|
$
|
29
|
|
Income from discontinued operations, net of taxes
|
$
|
750
|
|
|
$
|
54
|
|
|
$
|
741
|
|
|
$
|
66
|
|
Our discontinued operations consist of our divested Enterprise Security assets and also includes results of our previously divested Veritas information management business (Veritas). There was no income from Veritas during the three and six months ended October 4, 2019. Revenue from Veritas was $4 million and $9 million during the three and six months ended September 28, 2018. Income from Veritas, net of taxes was $0 million and $5 million during the three and six months ended September 28, 2018.
We recorded a $665 million tax benefit in discontinued operations during the three and six months ended October 4, 2019 to remeasure the deferred tax assets associated with the tax basis of intellectual property held by our subsidiaries organized in Ireland. We previously expected to recover the tax basis through normal operation of our Enterprise business, which is taxed at the Irish trading rate of 12.5%. We now expect to recover the tax basis through the sale of certain assets of the Enterprise business, which will be taxed at the Irish capital gains tax rate of 33%.
The following table presents significant non-cash items and capital expenditures of discontinued operations:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
Amortization and depreciation
|
$
|
123
|
|
|
$
|
182
|
|
Stock-based compensation expense
|
$
|
95
|
|
|
$
|
122
|
|
Purchases of property and equipment
|
$
|
29
|
|
|
$
|
16
|
|
See Note 18 for more information regarding the completion of the sale that occurred on November 4, 2019.
Note 4. Revenues
Timing of revenue recognition
The following table provides our revenue disaggregated by the timing of recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Products and services transferred at a point in time
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
25
|
|
|
$
|
24
|
|
Products and services transferred over time
|
$
|
596
|
|
|
$
|
600
|
|
|
$
|
1,233
|
|
|
$
|
1,200
|
|
Contract liabilities
The amount of revenue recognized during the three and six months ended October 4, 2019 that was included within the contract liabilities balance at July 5, 2019 and March 29, 2019 was $427 million and $767 million, respectively. The amount of revenue recognized during the three and six months ended September 28, 2018 that was included within the contract liabilities balance at June 29, 2018 and March 31, 2018 was $443 million and $766 million, respectively.
Contract acquisition costs
We recognized amortization expense of capitalized contract acquisition costs of $1 million and $3 million during the three and six months ended October 4, 2019, respectively, and $1 million and $2 million during the three and six months ended September 28, 2018, respectively. There were no impairment losses recognized during the periods.
Remaining performance obligations
Remaining performance obligations represent contracted revenue that has not been recognized, which include contract liabilities and amounts that will be billed and recognized as revenue in future periods. As of October 4, 2019, we had $626 million of remaining performance obligations, which does not include customer deposit liabilities of $390 million, of which we expect to recognize approximately 96% as revenue over the next twelve months.
Note 5. Leases
We lease certain of our facilities, equipment, and data center co-locations under operating leases that expire on various dates through fiscal 2029. Our leases generally have terms that range from 1 year to 17 years for our facilities, 1 year to 6 years for equipment, and 1 year to 6 years for data center co-locations. Some of our leases contain renewal options, escalation clauses, rent concessions, and leasehold improvement incentives.
We determine if an arrangement is a lease at inception. We have elected to not recognize a lease liability or ROU asset for short-term leases (leases with a term of twelve months or less that do not include an option to purchase the underlying asset). Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The interest rate we use to determine the present value of future payments is our incremental borrowing rate because the rate implicit in our leases is not readily determinable. Our incremental borrowing rate is a hypothetical rate for collateralized borrowings in economic environments where the leased asset is located based on credit rating factors. Our operating lease assets also include adjustments for prepaid lease payments, lease incentives and initial direct costs.
Certain lease contracts include obligations to pay for other services, such as operations and maintenance. We elected the practical expedient whereby we record all lease components and the related minimum non-lease components as a single lease component. Cash payments made for variable lease costs are not included in the measurement of our operating lease assets and liabilities. Many of our lease terms include one or more options to renew. We do not assume renewals in our determination of the lease term unless it is reasonably certain that we will exercise that option. Lease costs for minimum lease payments for operating leases is recognized on a straight-line basis over the lease term. Our lease agreements do not contain any residual value guarantees.
The following summarizes our lease costs:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
October 4, 2019
|
Operating lease costs
|
$
|
10
|
|
|
$
|
22
|
|
Short-term lease costs
|
2
|
|
|
4
|
|
Variable lease costs
|
5
|
|
|
11
|
|
Total lease costs
|
$
|
17
|
|
|
$
|
37
|
|
Rent expense under operating leases was $18 million and $37 million for the three and six months ended September 28, 2018, respectively.
Other information related to our operating leases was as follows:
|
|
|
|
|
Six Months Ended
|
|
October 4, 2019
|
Weighted-average remaining lease term
|
5.5 years
|
|
Weighted-average discount rate
|
4.14
|
%
|
See Note 7 for additional cash flow information related to our operating leases.
As of October 4, 2019, the maturities of our lease liabilities, excluding lease liabilities associated with our discontinued operations, by fiscal year are as follows:
|
|
|
|
|
(In millions)
|
|
Remainder of 2020
|
$
|
21
|
|
2021
|
42
|
|
2022
|
36
|
|
2023
|
27
|
|
2024
|
26
|
|
Thereafter
|
42
|
|
Total lease payments
|
194
|
|
Less: Imputed interest
|
(21
|
)
|
Present value of lease liabilities
|
$
|
173
|
|
As of March 29, 2019, the minimum future rentals on non-cancelable operating leases, including leases associated with our discontinued operations and based on the previous lease accounting standard, by fiscal year were as follows:
|
|
|
|
|
(In millions)
|
|
2020
|
$
|
55
|
|
2021
|
49
|
|
2022
|
40
|
|
2023
|
32
|
|
2024
|
26
|
|
Thereafter
|
42
|
|
Total minimum future lease payments
|
$
|
244
|
|
Note 6. Goodwill and Intangible Assets
Goodwill
The changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
(In millions)
|
|
Balance as of March 29, 2019
|
$
|
2,677
|
|
Translation adjustments
|
(2
|
)
|
Balance as of October 4, 2019
|
$
|
2,675
|
|
Intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 4, 2019
|
|
March 29, 2019
|
(In millions)
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Customer relationships
|
$
|
541
|
|
|
$
|
(208
|
)
|
|
$
|
333
|
|
|
$
|
541
|
|
|
$
|
(168
|
)
|
|
$
|
373
|
|
Developed technology
|
143
|
|
|
(76
|
)
|
|
67
|
|
|
143
|
|
|
(61
|
)
|
|
82
|
|
Other
|
4
|
|
|
(2
|
)
|
|
2
|
|
|
6
|
|
|
(3
|
)
|
|
3
|
|
Total finite-lived intangible assets
|
688
|
|
|
(286
|
)
|
|
402
|
|
|
690
|
|
|
(232
|
)
|
|
458
|
|
Indefinite-lived trade names
|
744
|
|
|
—
|
|
|
744
|
|
|
744
|
|
|
—
|
|
|
744
|
|
Total intangible assets
|
$
|
1,432
|
|
|
$
|
(286
|
)
|
|
$
|
1,146
|
|
|
$
|
1,434
|
|
|
$
|
(232
|
)
|
|
$
|
1,202
|
|
Goodwill and intangible assets to be disposed of as a result of our agreement with Broadcom to sell certain assets of Enterprise Security business were included in assets of discontinued operations in our Condensed Consolidated Balance Sheets as of October 4, 2019 and March 29, 2019, and accordingly, are excluded from the tables above.
Amortization expense for purchased intangible assets is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Statements of Operations Classification
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
|
Customer relationships and other
|
$
|
21
|
|
|
$
|
20
|
|
|
$
|
41
|
|
|
$
|
40
|
|
|
Operating expenses
|
Developed technology
|
8
|
|
|
8
|
|
|
15
|
|
|
14
|
|
|
Cost of revenues
|
Total
|
$
|
29
|
|
|
$
|
28
|
|
|
$
|
56
|
|
|
$
|
54
|
|
|
|
As of October 4, 2019, future amortization expense related to intangible assets that have finite lives is as follows by fiscal year:
|
|
|
|
|
(In millions)
|
|
Remainder of 2020
|
$
|
54
|
|
2021
|
106
|
|
2022
|
99
|
|
2023
|
78
|
|
2024
|
64
|
|
Thereafter
|
1
|
|
Total
|
$
|
402
|
|
Note 7. Supplementary Information (in millions)
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
October 4, 2019
|
|
March 29, 2019
|
Cash
|
$
|
395
|
|
|
$
|
376
|
|
Cash equivalents
|
1,302
|
|
|
1,415
|
|
Total cash and cash equivalents
|
$
|
1,697
|
|
|
$
|
1,791
|
|
Other current assets:
|
|
|
|
|
|
|
|
|
|
October 4, 2019
|
|
March 29, 2019
|
Prepaid expenses
|
$
|
118
|
|
|
$
|
136
|
|
Income tax receivable and prepaid income taxes
|
26
|
|
|
61
|
|
Other tax receivable
|
123
|
|
|
69
|
|
Other
|
22
|
|
|
20
|
|
Total other current assets
|
$
|
289
|
|
|
$
|
286
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
|
October 4, 2019
|
|
March 29, 2019
|
Land
|
$
|
65
|
|
|
$
|
65
|
|
Computer hardware and software
|
917
|
|
|
926
|
|
Office furniture and equipment
|
123
|
|
|
118
|
|
Buildings
|
364
|
|
|
364
|
|
Leasehold improvements
|
355
|
|
|
332
|
|
Construction in progress
|
7
|
|
|
12
|
|
Total property and equipment, gross
|
1,831
|
|
|
1,817
|
|
Accumulated depreciation and amortization
|
(1,155
|
)
|
|
(1,099
|
)
|
Total property and equipment, net
|
$
|
676
|
|
|
$
|
718
|
|
Other long-term assets:
|
|
|
|
|
|
|
|
|
|
October 4, 2019
|
|
March 29, 2019
|
Cost method investments
|
$
|
186
|
|
|
$
|
184
|
|
Equity method investment
|
11
|
|
|
32
|
|
Long-term income tax receivable and prepaid income taxes
|
43
|
|
|
34
|
|
Deferred income tax assets
|
1,498
|
|
|
830
|
|
Other
|
80
|
|
|
83
|
|
Total other long-term assets
|
$
|
1,818
|
|
|
$
|
1,163
|
|
Short-term contract liabilities:
|
|
|
|
|
|
|
|
|
|
October 4, 2019
|
|
March 29, 2019
|
Deferred revenue
|
$
|
600
|
|
|
$
|
527
|
|
Customer deposit liabilities
|
390
|
|
|
505
|
|
Total short-term contract liabilities
|
$
|
990
|
|
|
$
|
1,032
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
October 4, 2019
|
|
March 29, 2019
|
Income taxes payable
|
|
$
|
93
|
|
|
$
|
103
|
|
Other taxes payable
|
|
202
|
|
|
143
|
|
Other
|
|
219
|
|
|
278
|
|
Total other current liabilities
|
|
$
|
514
|
|
|
$
|
524
|
|
Long-term income taxes payable:
|
|
|
|
|
|
|
|
|
|
October 4, 2019
|
|
March 29, 2019
|
Deemed repatriation tax payable
|
$
|
638
|
|
|
$
|
703
|
|
Uncertain tax positions (including interest and penalties)
|
431
|
|
|
373
|
|
Total long-term income taxes payable
|
$
|
1,069
|
|
|
$
|
1,076
|
|
Other expense, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Interest income
|
$
|
8
|
|
|
$
|
11
|
|
|
$
|
18
|
|
|
$
|
18
|
|
Loss from equity interest
|
(11
|
)
|
|
(34
|
)
|
|
(22
|
)
|
|
(60
|
)
|
Foreign exchange gain (loss)
|
1
|
|
|
(4
|
)
|
|
(2
|
)
|
|
(9
|
)
|
Other
|
—
|
|
|
4
|
|
|
4
|
|
|
13
|
|
Other expense, net
|
$
|
(2
|
)
|
|
$
|
(23
|
)
|
|
$
|
(2
|
)
|
|
$
|
(38
|
)
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
October 4, 2019
|
|
September 28, 2018
|
Income taxes paid, net of refunds
|
$
|
165
|
|
|
$
|
57
|
|
Interest expense paid
|
$
|
86
|
|
|
$
|
93
|
|
Cash paid for amounts included in the measurement of operating lease liabilities
|
$
|
31
|
|
|
$
|
—
|
|
Non-cash operating activities:
|
|
|
|
Operating lease assets obtained in exchange for operating lease liabilities
|
$
|
13
|
|
|
$
|
—
|
|
Non-cash investing activities:
|
|
|
|
Purchases of property and equipment in current liabilities
|
$
|
11
|
|
|
$
|
29
|
|
Note 8. Financial Instruments and Fair Value Measurements
For financial instruments measured at fair value, fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact, and we consider assumptions that market participants would use when pricing the asset or liability.
The three levels of inputs that may be used to measure fair value are:
|
|
•
|
Level 1: Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in less active markets or model-derived valuations. All significant inputs used in our valuations, such as
|
discounted cash flows, are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities.
|
|
•
|
Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities. We monitor and review the inputs and results of these valuation models to help ensure the fair value measurements are reasonable and consistent with market experience in similar asset classes.
|
Assets measured and recorded at fair value on a recurring basis
The following table summarizes our financial instruments measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 4, 2019
|
|
March 29, 2019
|
(In millions)
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
1,117
|
|
|
$
|
1,117
|
|
|
$
|
—
|
|
|
$
|
1,415
|
|
|
$
|
1,415
|
|
|
$
|
—
|
|
Certificates of deposit
|
185
|
|
|
—
|
|
|
185
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Corporate bonds
|
134
|
|
|
—
|
|
|
134
|
|
|
251
|
|
|
—
|
|
|
251
|
|
Total
|
$
|
1,436
|
|
|
$
|
1,117
|
|
|
$
|
319
|
|
|
$
|
1,667
|
|
|
$
|
1,415
|
|
|
$
|
252
|
|
The following table presents the contractual maturities of our investments in debt securities as of October 4, 2019:
|
|
|
|
|
(In millions)
|
Fair Value
|
Due in one year or less
|
$
|
276
|
|
Due after one year through five years
|
43
|
|
Total
|
$
|
319
|
|
Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.
Financial instruments not recorded at fair value on a recurring basis include our non-marketable equity investments, equity method investment and our long-term debt.
Non-marketable equity investments
As of October 4, 2019 and March 29, 2019, the carrying value of our non-marketable equity investments was $186 million and $184 million, respectively.
Equity method investment
Our investment in equity securities that is accounted for using the equity method is included in Other long-term assets in our Condensed Consolidated Balance Sheets and consists of our equity investment in DigiCert Parent Inc. (DigiCert) that had a carrying value of $11 million and $32 million at October 4, 2019 and March 29, 2019, respectively.
We recorded a loss from equity interests of $11 million and $22 million during the three and six months ended October 4, 2019, respectively, and $34 million and $60 million during the three and six months ended September 28, 2018, respectively, in Other expense, net in our Condensed Consolidated Statements of Operations. This loss was reflected as a reduction in the carrying amount of our investment in equity interests in our Condensed Consolidated Balance Sheets.
The following table summarizes financial data from DigiCert which was provided to us on a three-month lag:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
June 30, 2019
|
|
June 30, 2018
|
|
June 30, 2019
|
|
June 30, 2018
|
Revenue
|
$
|
108
|
|
|
$
|
74
|
|
|
$
|
215
|
|
|
$
|
140
|
|
Gross profit
|
$
|
90
|
|
|
$
|
61
|
|
|
$
|
177
|
|
|
$
|
114
|
|
Net loss
|
$
|
(36
|
)
|
|
$
|
(123
|
)
|
|
$
|
(72
|
)
|
|
$
|
(205
|
)
|
Current and long-term debt
As of October 4, 2019 and March 29, 2019, the total fair value of our current and long-term fixed rate debt was $4,020 million and $3,964 million, respectively. The fair value of our variable rate debt approximated its carrying value. The fair values of all our debt obligations were based on Level 2 inputs.
Note 9. Debt
The following table summarizes components of our debt:
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
October 4, 2019
|
|
March 29, 2019
|
|
Effective
Interest Rate
|
4.2% Senior Notes due September 15, 2020
|
$
|
750
|
|
|
$
|
750
|
|
|
4.25
|
%
|
2.5% Convertible Senior Notes due April 1, 2021
|
500
|
|
|
500
|
|
|
3.76
|
%
|
Senior Term Loan A-5 due August 1, 2021
|
500
|
|
|
500
|
|
|
LIBOR plus (1)
|
|
2.0% Convertible Senior Notes due August 15, 2021
|
1,250
|
|
|
1,250
|
|
|
2.66
|
%
|
3.95% Senior Notes due June 15, 2022
|
400
|
|
|
400
|
|
|
4.05
|
%
|
5.0% Senior Notes due April 15, 2025
|
1,100
|
|
|
1,100
|
|
|
5.23
|
%
|
Total principal amount
|
4,500
|
|
|
4,500
|
|
|
|
Less: unamortized discount and issuance costs
|
(36
|
)
|
|
(48
|
)
|
|
|
Total debt
|
4,464
|
|
|
4,452
|
|
|
|
Less: current portion
|
(1,245
|
)
|
|
(491
|
)
|
|
|
Total long-term debt
|
$
|
3,219
|
|
|
$
|
3,961
|
|
|
|
|
|
(1)
|
The senior term facility bears interest at a rate equal to the London Interbank Offered Rate (LIBOR) plus a margin based on the current debt rating of our non-credit-enhanced, senior unsecured long-term debt and the underlying loan agreement. The interest rates for the outstanding senior term loan are as follows:
|
|
|
|
|
|
|
|
|
October 4, 2019
|
|
March 29, 2019
|
Senior Term Loan A-5 due August 1, 2021
|
3.90
|
%
|
|
4.24
|
%
|
On or after March 4, 2020, holders of the 2.5% Convertible Senior Notes have the option to require us to repurchase the notes, in cash, equal to the principal amount and accrued and unpaid interest of the 2.5% Convertible Senior Notes. Therefore, as of October 4, 2019 and March 29, 2019, the principal amount and associated unamortized discount and issuance costs of the 2.5% Convertible Senior Notes were classified within Current portion of long-term debt in our Condensed Consolidated Balance Sheets.
As of October 4, 2019, the future contractual maturities of debt by fiscal year are as follows:
|
|
|
|
|
(In millions)
|
|
Remainder of 2020
|
$
|
—
|
|
2021
|
1,250
|
|
2022
|
1,750
|
|
2023
|
400
|
|
2024
|
—
|
|
Thereafter
|
1,100
|
|
Total future maturities of debt
|
$
|
4,500
|
|
Based on the closing price of our common stock of $23.48 on October 4, 2019, the if-converted value of our 2.5% Convertible Senior Notes exceeded the principal amount by approximately $200 million and the if-converted value of our 2.0% Convertible Senior Notes exceeded the principal amount by approximately $188 million.
The following table sets forth total interest expense recognized related to our 2.5% and 2.0% Convertible Senior Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Contractual interest expense
|
$
|
9
|
|
|
$
|
10
|
|
|
$
|
19
|
|
|
$
|
19
|
|
Amortization of debt discount and issuance costs
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
8
|
|
|
$
|
8
|
|
Revolving credit facility
We have an unsecured revolving credit facility to borrow up to $1.0 billion through May 10, 2021. Borrowings under the revolving facility bear interest at a floating rate of interest plus an applicable margin which is based on our senior unsecured credit agency rating. We are obligated to pay commitment fees on the daily amount of the unused commitment at a rate based
on our debt ratings. As of October 4, 2019 and March 29, 2019, there were no borrowings outstanding under this revolving credit facility.
Debt Covenant compliance
The Senior Term Loan A-5 agreement contains customary representations and warranties, non-financial covenants for financial reporting, and affirmative and negative covenants, including compliance with specified financial ratios. As of October 4, 2019, we were in compliance with all debt covenants.
Note 10. Derivatives
We conduct business in numerous currencies throughout our worldwide operations, and our entities hold monetary assets or liabilities, earn revenues, or incur costs in currencies other than the entity’s functional currency. As a result, we are exposed to foreign exchange gains or losses which impacts our operating results. As part of our foreign currency risk mitigation strategy, we have entered into foreign exchange forward contracts with up to twelve months in duration. We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of the changes in foreign exchange rates.
To help protect the net investment in a foreign operation from adverse changes in foreign currency exchange rates, we conduct a program under which we may enter into foreign currency forward and option contracts to offset the changes in the carrying amounts of these investments due to fluctuations in foreign currency exchange rates. We exclude changes in forward points for the forward contracts from the assessment of hedge effectiveness. We recognize changes in the excluded component in other income (expense), net. As of October 4, 2019 and September 28, 2018, the fair value of these contracts was insignificant. During the six months ended October 4, 2019, a net gain of $2 million was recorded in Accumulated other comprehensive loss.
We also enter into foreign currency forward contracts to hedge foreign currency balance sheet exposure. These forward contracts are not designated as hedging instruments. As of October 4, 2019 and September 28, 2018, the fair value of these contracts was insignificant. The related loss recognized in Other expense, net in our Condensed Consolidated Statements of Operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Foreign exchange forward contracts loss
|
$
|
(6
|
)
|
|
$
|
(2
|
)
|
|
$
|
(6
|
)
|
|
$
|
(38
|
)
|
The fair value of our foreign exchange forward contracts is presented on a gross basis in our Condensed Consolidated Balance Sheets. To mitigate losses in the event of nonperformance by counterparties, we have entered into master netting arrangements with our counterparties that allow us to settle payments on a net basis. The effect of netting on our derivative assets and liabilities was not material as of October 4, 2019 and September 28, 2018.
The notional amount of our outstanding foreign exchange forward contracts in U.S. dollar equivalent was as follows:
|
|
|
|
|
|
|
|
|
(In millions)
|
October 4, 2019
|
|
March 29, 2019
|
Net investment hedges
|
|
|
|
Foreign exchange forward contracts sold
|
$
|
120
|
|
|
$
|
116
|
|
Balance sheet contracts
|
|
|
|
Foreign exchange forward contracts purchased
|
$
|
410
|
|
|
$
|
963
|
|
Foreign exchange forward contracts sold
|
$
|
277
|
|
|
$
|
122
|
|
Note 11. Restructuring, Transition and Other Costs
Our restructuring, transition and other costs consist primarily of severance, facilities, separation, transition and other related costs. Severance costs generally include severance payments, outplacement services, health insurance coverage, and legal costs. Included in other exit and disposal costs are advisory fees incurred in connection with restructuring events and facilities exit costs, which generally include rent expense and lease termination costs, less estimated sublease income. Separation costs primarily consist of consulting costs incurred in connection with the divestiture of our Enterprise Security business. Transition costs are incurred in connection with Board of Directors approved discrete strategic information technology transformation initiatives and primarily consist of consulting charges associated with our enterprise resource planning and supporting systems and costs to automate business processes. Such projects were completed by the end of fiscal 2019.
Fiscal 2020 Plan
On August 6, 2019, our Board of Directors approved a fiscal 2020 restructuring plan (the Fiscal 2020 Plan) to improve productivity and reduce complexity in the way we manage the business. We expect to reduce net global headcount by approximately 7%. We also plan to downsize, vacate or close certain facilities and data centers in connection with the restructuring plan. We estimate that we will incur total costs in connection with the restructuring of approximately $100 million,
approximately $75 million for severance and termination benefits and $25 million for site closures. These actions are expected to be completed in fiscal 2020. As of October 4, 2019, we have incurred costs of $49 million related to our Fiscal 2020 Plan.
Fiscal 2019 Plan
In August 2018, we announced a restructuring plan (the Fiscal 2019 Plan) under which we incurred costs of $48 million as of October 4, 2019. These actions were substantially completed in fiscal 2020.
Fiscal 2017 Plan
We initiated a restructuring plan in the first quarter of fiscal 2017 to reduce complexity by means of long-term structural improvements (the Fiscal 2017 Plan), under which we reduced headcount and closed certain facilities. These actions were completed in fiscal 2019 at a cumulative cost of $289 million related to our Fiscal 2017 Plan.
Restructuring, transition and other costs summary
Our restructuring, transition and other costs attributable to continuing operations are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Severance and termination benefit costs
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
28
|
|
|
$
|
5
|
|
Other exit and disposal costs
|
—
|
|
|
1
|
|
|
2
|
|
|
8
|
|
Asset write-offs
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Separation costs
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Transition costs
|
—
|
|
|
51
|
|
|
—
|
|
|
119
|
|
Total restructuring, transition and other costs
|
$
|
17
|
|
|
$
|
52
|
|
|
$
|
30
|
|
|
$
|
137
|
|
In connection with the agreement to sell certain assets of our Enterprise Security business, a portion of our restructuring, transition and other costs were classified to discontinued operations for all periods presented. Our restructuring, transition and other costs attributable to discontinued operations are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4,
2019
|
|
September 28,
2018
|
|
October 4,
2019
|
|
September 28,
2018
|
Severance and termination benefit costs
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
45
|
|
|
$
|
7
|
|
Other exit and disposal costs
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Separation costs
|
7
|
|
|
—
|
|
|
7
|
|
|
—
|
|
Transition costs
|
—
|
|
|
4
|
|
|
—
|
|
|
6
|
|
Total restructuring, transition and other
|
$
|
40
|
|
|
$
|
4
|
|
|
$
|
52
|
|
|
$
|
15
|
|
Note 12. Income Taxes
The following table summarizes our effective tax rate for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions, except percentages)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Income (loss) from continuing operations before income taxes
|
$
|
55
|
|
|
$
|
(32
|
)
|
|
$
|
140
|
|
|
$
|
(128
|
)
|
Income tax expense
|
$
|
20
|
|
|
$
|
30
|
|
|
$
|
70
|
|
|
$
|
6
|
|
Effective tax rate
|
36
|
%
|
|
(94
|
)%
|
|
50
|
%
|
|
(5
|
)%
|
Our effective tax rate for continuing operations for fiscal 2020 was based on the statutory tax rate of 21%. Our effective tax rate for continuing operations for the three and six months ended October 4, 2019 differs from the federal statutory income tax rate primarily due to various permanent differences, and state taxes, partially offset by the benefits of lower-taxed international earnings and the research and development tax credit. In addition, for the six months ended October 4, 2019, there was additional tax expense recorded to account for uncertain tax positions related to the recent holding of the Ninth Circuit Court of Appeals (Ninth Circuit) in Altera Corp. v. Commissioner (the Altera holding).
Our effective tax rate for income (loss) from continuing operations for the three and six months ended September 28, 2018 differs from the federal statutory income tax rate primarily due to tax expense recorded to account for one-time adjustments for guidance issued on the Tax Cuts and Jobs Act (H.R.1) (Tax Reform) and other changes in response to the Tax Reform, various
permanent differences, and state taxes, partially offset by the benefits of lower-taxed international earnings and the research and development tax credit.
On July 27, 2015, the United States Tax Court (Tax Court) issued its opinion in Altera Corp. v. Commissioner and concluded that related parties in a cost sharing arrangement are not required to share expenses related to stock-based compensation. The Commissioner of the Internal Revenue Service appealed the Tax Court decision to the Ninth Circuit. In June 2019, the Ninth Circuit reversed the July 2015 decision of the U.S. Tax Court. As a result of this decision, we recorded a cumulative income tax expense of $62 million in six months ended October 4, 2019. On July 22, 2019, the taxpayer requested a rehearing before the full Ninth Circuit and may subsequently appeal from the Ninth Circuit to the Supreme Court. As a result, the final outcome of the case is uncertain. If the Altera holding is reversed, we would anticipate recording an income tax benefit at that time.
The aggregate changes in the balance of gross unrecognized tax benefits for the six months ended October 4, 2019 were as follows:
|
|
|
|
|
(In millions)
|
|
Balance as of March 29, 2019
|
$
|
446
|
|
Lapse of statute of limitations
|
(14
|
)
|
Increase related to prior period tax positions
|
63
|
|
Increase related to current year tax positions
|
31
|
|
Balance as of October 4, 2019
|
$
|
526
|
|
We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.
Note 13. Stockholders' Equity
Stock repurchase program
During the six months ended October 4, 2019, we executed and settled repurchases of 25 million shares for $541 million in the open market at an average price of $21.85 per share. In addition, repurchases of 1 million shares executed during fiscal 2019 settled during the six months ended October 4, 2019. On August 6, 2019, our Board of Directors increased the share repurchase authorization to $1,600 million. As of October 4, 2019, we had $1,600 million remaining under the authorization to be completed in future periods with no expiration date.
Accumulated other comprehensive loss
Components of Accumulated other comprehensive loss, net of taxes, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Foreign Currency
Translation Adjustments
|
|
Unrealized Gain (Loss) on
Available-For-Sale Securities
|
|
Equity Method Investee
|
|
Total
|
Balance as of March 29, 2019
|
$
|
(5
|
)
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
(7
|
)
|
Other comprehensive income before reclassifications
|
2
|
|
|
2
|
|
|
1
|
|
|
5
|
|
Balance as of October 4, 2019
|
$
|
(3
|
)
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
Note 14. Employee Equity Incentive Plans
The following table sets forth the stock-based compensation expense recognized for our equity incentive plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Cost of revenues
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
3
|
|
Sales and marketing
|
6
|
|
|
11
|
|
|
13
|
|
|
22
|
|
Research and development
|
8
|
|
|
8
|
|
|
15
|
|
|
16
|
|
General and administrative
|
14
|
|
|
18
|
|
|
26
|
|
|
47
|
|
Total stock-based compensation from continuing operations
|
29
|
|
|
38
|
|
|
55
|
|
|
88
|
|
Discontinued operations
|
41
|
|
|
59
|
|
|
95
|
|
|
122
|
|
Total stock-based compensation expense
|
$
|
70
|
|
|
$
|
97
|
|
|
$
|
150
|
|
|
$
|
210
|
|
Income tax benefit for stock-based compensation expense
|
$
|
(14
|
)
|
|
$
|
(21
|
)
|
|
$
|
(29
|
)
|
|
$
|
(47
|
)
|
The following table summarizes additional information related to our stock-based awards, including awards associated with our discontinued operations:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(In millions, except per grant data)
|
October 4, 2019
|
|
September 28, 2018
|
Restricted stock units (RSUs):
|
|
|
|
Weighted-average fair value per award granted
|
$
|
19.50
|
|
|
$
|
21.65
|
|
Awards granted
|
12
|
|
|
12
|
|
Total fair value of awards released
|
$
|
199
|
|
|
$
|
195
|
|
Outstanding and unvested
|
20
|
|
|
21
|
|
Performance-based restricted stock units (PRUs):
|
|
|
|
Weighted-average fair value per award granted
|
$
|
19.21
|
|
|
$
|
21.23
|
|
Awards granted
|
2
|
|
|
2
|
|
Total fair value of awards released
|
$
|
28
|
|
|
$
|
8
|
|
Outstanding and unvested at target payout
|
3
|
|
|
5
|
|
Stock options:
|
|
|
|
Weight-average fair value per award granted
|
$
|
4.76
|
|
|
$
|
—
|
|
Awards granted
|
2
|
|
|
—
|
|
Total intrinsic value of stock options exercised
|
$
|
113
|
|
|
$
|
11
|
|
Outstanding
|
6
|
|
|
13
|
|
Exercisable
|
4
|
|
|
12
|
|
Restricted stock:
|
|
|
|
Outstanding and unvested
|
—
|
|
|
1
|
|
For certain employees, we settled fiscal 2019 bonuses in approximately 1 million RSUs. These awards were granted and vested in the first quarter of fiscal 2020. As of October 4, 2019 and March 29, 2019, the total liability associated with liability-classified awards was $6 million and $22 million, respectively, which is presented in Accrued compensation and benefits in our Condensed Consolidated Balance Sheets.
As of October 4, 2019, the total unrecognized stock-based compensation costs related to our unvested stock-based awards was $446 million, which will be recognized over an estimated weighted-average amortization period of 1.9 years.
Note 15. Net Income Per Share
Basic income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share also includes the incremental effect of dilutive potentially issuable common shares outstanding during the period using the treasury stock method. Dilutive potentially issuable common shares includes the dilutive effect of the shares underlying convertible debt and employee equity awards. Diluted loss per share was the same as basic loss per share for the three and six months ended September 28, 2018, as there was a loss from continuing operations in the period and inclusion of potentially issuable shares was anti-dilutive.
The components of basic and diluted net income (loss) per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions, except per share amounts)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Income (loss) from continuing operations
|
$
|
35
|
|
|
$
|
(62
|
)
|
|
$
|
70
|
|
|
$
|
(134
|
)
|
Income from discontinued operations, net of taxes
|
750
|
|
|
54
|
|
|
741
|
|
|
66
|
|
Net income (loss)
|
$
|
785
|
|
|
$
|
(8
|
)
|
|
$
|
811
|
|
|
$
|
(68
|
)
|
Income (loss) per share - basic:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.06
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.21
|
)
|
Discontinued operations
|
$
|
1.21
|
|
|
$
|
0.09
|
|
|
$
|
1.20
|
|
|
$
|
0.11
|
|
Net income (loss) per share - basic
|
$
|
1.27
|
|
|
$
|
(0.01
|
)
|
|
$
|
1.31
|
|
|
$
|
(0.11
|
)
|
Income (loss) per share - diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.05
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.21
|
)
|
Discontinued operations
|
$
|
1.16
|
|
|
$
|
0.09
|
|
|
$
|
1.15
|
|
|
$
|
0.11
|
|
Net income (loss) per share - diluted
|
$
|
1.22
|
|
|
$
|
(0.01
|
)
|
|
$
|
1.26
|
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - basic
|
620
|
|
|
630
|
|
|
619
|
|
|
627
|
|
Dilutive potentially issuable shares:
|
|
|
|
|
|
|
|
Convertible debt
|
16
|
|
|
—
|
|
|
13
|
|
|
—
|
|
Employee equity awards
|
8
|
|
|
—
|
|
|
11
|
|
|
—
|
|
Weighted-average shares outstanding - diluted
|
644
|
|
|
630
|
|
|
643
|
|
|
627
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares excluded from diluted net income (loss) per share calculation:
|
|
|
|
|
|
|
|
Convertible debt
|
—
|
|
|
91
|
|
|
—
|
|
|
91
|
|
Employee equity awards
|
2
|
|
|
50
|
|
|
3
|
|
|
50
|
|
Total
|
2
|
|
|
141
|
|
|
3
|
|
|
141
|
|
(1) Net income per share amounts may not add due to rounding.
Under the treasury stock method, our Convertible Senior Notes will generally have a dilutive impact on net income per share when our average stock price for the period exceeds approximately $16.77 per share for the 2.5% Convertible Senior Notes and $20.41 per share for the 2.0% Convertible Senior Notes. The conversion feature of both notes was anti-dilutive during the three and six months ended September 28, 2018 as there was a loss from continuing operations in the period.
Note 16. Segment and Geographic Information
Historically, we operated in two reportable segments: Enterprise Security and Consumer Cyber Safety. The Enterprise Security segment focused on providing our Integrated Cyber Defense solutions to help business and government customers unify cloud and on-premises security to deliver a more effective cyber defense solution, while driving down cost and complexity. The Consumer Cyber Safety segment focused on providing cyber safety solutions under our Norton LifeLock brand to help consumers protect their devices, online privacy, identities, and home networks. On August 8, 2019, we entered into a definitive agreement to sell certain assets of our Enterprise Security business to Broadcom, representing substantially all of our Enterprise Security segment. This transaction closed on November 4, 2019. The divestiture of these Enterprise Security assets allows us to shift our operational focus to our consumer business and represents a strategic shift in our operations. As a result, the results of our divested Enterprise Security assets were classified as discontinued operations in our Condensed Consolidated Statements of Operations and thus excluded from both continuing operations and segment results for all periods presented. Accordingly, we now have one reportable segment. Our Chief Operating Decision Maker reviews financial information presented on a
consolidated basis to evaluate company performance and to allocate resources. The change has been reflected in our segment reporting for all periods presented.
The following table summarizes net revenues by significant products and services categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Consumer security
|
$
|
358
|
|
|
$
|
368
|
|
|
$
|
739
|
|
|
$
|
737
|
|
Identity and information protection
|
237
|
|
|
233
|
|
|
492
|
|
|
464
|
|
Other
|
13
|
|
|
11
|
|
|
27
|
|
|
23
|
|
Total net revenues
|
$
|
608
|
|
|
$
|
612
|
|
|
$
|
1,258
|
|
|
$
|
1,224
|
|
Consumer security products include Norton security, Norton Secure VPN, and other consumer security solutions. Identity and information protection products include LifeLock identity theft protection and other information protection solutions.
Geographical information
Net revenues by geography are based on the billing addresses of our customers. The following table represents net revenues by geographic area for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Americas
|
$
|
447
|
|
|
$
|
447
|
|
|
$
|
926
|
|
|
$
|
884
|
|
EMEA
|
92
|
|
|
96
|
|
|
189
|
|
|
200
|
|
APJ
|
69
|
|
|
69
|
|
|
143
|
|
|
140
|
|
Total net revenues
|
$
|
608
|
|
|
$
|
612
|
|
|
$
|
1,258
|
|
|
$
|
1,224
|
|
The Americas include U.S., Canada and Latin America; EMEA includes Europe, Middle East and Africa; APJ includes Asia Pacific and Japan.
Revenues from customers inside the U.S. were $427 million and $883 million during the three and six months ended October 4, 2019, respectively, and $425 million and $842 million during the three and six months ended September 28, 2018, respectively. No other individual country accounted for more than 10% of revenues.
Most of our assets as of October 4, 2019 and March 29, 2019 were attributable to our U.S. operations. The table below represents cash, cash equivalents and short-term investments held in the U.S. and internationally in various foreign subsidiaries.
|
|
|
|
|
|
|
|
|
(In millions)
|
October 4, 2019
|
|
March 29, 2019
|
U.S.
|
$
|
1,429
|
|
|
$
|
1,544
|
|
International
|
402
|
|
|
499
|
|
Total cash, cash equivalent and short-term investments
|
$
|
1,831
|
|
|
$
|
2,043
|
|
The table below represents our property and equipment, net of accumulated depreciation and amortization, by geographic area, based on the physical location of the asset, at the end of each period presented.
|
|
|
|
|
|
|
|
|
(In millions)
|
October 4, 2019
|
|
March 29, 2019
|
U.S.
|
$
|
565
|
|
|
$
|
606
|
|
International (1)
|
111
|
|
|
112
|
|
Total property and equipment, net
|
$
|
676
|
|
|
$
|
718
|
|
|
|
(1)
|
No individual country represented more than 10% of the respective totals.
|
Our operating lease assets by geographic area, based on the physical location of the asset, were as follows:
|
|
|
|
|
(In millions)
|
October 4, 2019
|
U.S.
|
$
|
77
|
|
International (1)
|
77
|
|
Total operating lease assets
|
$
|
154
|
|
|
|
(1)
|
No individual country represented more than 10% of the respective totals.
|
Significant customers
Customers, which are distributors, that accounted for over 10% of our net accounts receivable were as follows:
|
|
|
|
|
|
|
|
October 4, 2019
|
|
March 29, 2019
|
Customer A
|
13
|
%
|
|
16
|
%
|
Customer B
|
13
|
%
|
|
15
|
%
|
Note 17. Commitments and Contingencies
Purchase obligations
As of October 4, 2019, we had purchase obligations of $983 million associated with agreements for purchases of goods or services, including purchase obligations associated with our discontinued operations. The amount of purchase obligations reflects estimated future payments as of October 4, 2019 according to the contract terms.
Deemed repatriation taxes
As of October 4, 2019, we are required to pay a one-time transition tax of $703 million on untaxed foreign earnings of our foreign subsidiaries due in installments through July 2025 as a result of the Act.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, subsidiaries, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements or representations and warranties made by us. In addition, our bylaws contain indemnification obligations to our directors, officers, employees, and agents, and we have entered into indemnification agreements with our directors and certain of our officers to give such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in our bylaws and to provide additional procedural protections. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers. It is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements might not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements, and we have not accrued any material liabilities related to such indemnification obligations in our Condensed Consolidated Financial Statements.
In connection with the sale of Veritas, we assigned several leases to Veritas Technologies LLC or its related subsidiaries. As a condition to consenting to the assignments, certain lessors required us to agree to indemnify the lessor under the applicable lease with respect to certain matters, including, but not limited to, losses arising out of Veritas Technologies LLC or its related subsidiaries’ breach of payment obligations under the terms of the lease. As with our other indemnification obligations discussed above and in general, it is not possible to determine the aggregate maximum potential loss under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. As with our other indemnification obligations, such indemnification agreements might not be subject to maximum loss clauses, and to date, generally under our real estate obligations, we have not incurred material costs as a result of such obligations under our leases and have not accrued any liabilities related to such indemnification obligations in our Condensed Consolidated Financial Statements.
We provide limited product warranties, and the majority of our software license agreements contain provisions that indemnify licensees of our software from damages and costs resulting from claims alleging that our software infringes on the intellectual property rights of a third party. Historically, payments made under these provisions have been immaterial. We monitor the conditions that are subject to indemnification to identify if a loss has occurred.
Litigation contingencies
SEC Investigation
As previously disclosed in our public filings, the Audit Committee of our Board of Directors (the Audit Committee) completed its internal investigation (the Audit Committee Investigation) in September 2018. In connection with the Audit Committee Investigation, we voluntarily contacted the U.S. Securities and Exchange Commission (SEC) in April 2018. The SEC
commenced a formal investigation, and we continue to cooperate with that investigation. The outcome of such an investigation is difficult to predict. We have incurred, and will continue to incur, significant expenses related to legal and other professional services in connection with the SEC investigation. At this stage, we are unable to assess whether any material loss or adverse effect is reasonably possible as a result of the SEC’s investigation or estimate the range of any potential loss.
Securities Class Action and Derivative Litigation
Securities class action lawsuits, which have since been consolidated, were filed in May 2018 against us and certain of our former officers, in the U.S. District Court for the Northern District of California. The lead plaintiff’s consolidated amended complaint alleged that, during a purported class period of May 11, 2017 to August 2, 2018, defendants made false and misleading statements in violation of Sections 10(b) and 20(a), and that certain individuals violated Section 20A, of the Securities Exchange Act. Defendants filed motions to dismiss, which the Court granted in an order dated June 14, 2019. Pursuant to that order, plaintiff filed a motion seeking leave to amend and a proposed first amended complaint on July 11, 2019. The Court granted the motion in part on October 2, 2019 and the first amended complaint was filed on October 11, 2019. The Court’s order dismissed certain claims and certain of our former officers. The Court ordered defendants to answer by November 7. No trial date has been set.
Purported shareholder derivative lawsuits have been filed against us and certain of our former officers and current and former directors in the U.S. District Courts for the District of Delaware and the Northern District of California, Delaware Chancery Court, and Delaware Superior Court, arising generally out of the same facts and circumstances as alleged in the securities class action and alleging claims for breach of fiduciary duty and related claims; these lawsuits include an action brought derivatively on behalf of our 2008 Employee Stock Purchase Plan. The derivative actions are currently voluntarily stayed in light of the securities class action. No specific amount of damages has been alleged in these lawsuits. We have also received demands from purported stockholders to inspect corporate books and records under Delaware law.
We will continue to incur legal fees in connection with these pending cases and demands, including expenses for the reimbursement of legal fees of present and former officers and directors under indemnification obligations. The expense of continuing to defend such litigation may be significant. We intend to defend these lawsuits vigorously, but there can be no assurance that we will be successful in any defense. If any of the lawsuits are decided adversely, we may be liable for significant damages directly or under our indemnification obligations, which could adversely affect our business, results of operations, and cash flows.
At this stage, we are unable to assess whether any material loss or adverse effect is reasonably possible as a result of these lawsuits or estimate the range of any potential loss.
GSA
During the first quarter of fiscal 2013, we were advised by the Commercial Litigation Branch of the Department of Justice’s (DOJ) Civil Division and the Civil Division of the U.S. Attorney’s Office for the District of Columbia that the government is investigating our compliance with certain provisions of our U.S. General Services Administration (GSA) Multiple Award Schedule Contract No. GS-35F-0240T effective January 24, 2007, including provisions relating to pricing, country of origin, accessibility, and the disclosure of commercial sales practices.
As reported on the GSA’s publicly-available database, our total sales under the GSA Schedule contract were approximately $222 million from the period beginning January 2007 and ending September 2012. We have fully cooperated with the government throughout its investigation, and in January 2014, representatives of the government indicated that their initial analysis of our actual damages exposure from direct government sales under the GSA schedule was approximately $145 million; since the initial meeting, the government’s analysis of our potential damages exposure relating to direct sales has increased. The government has also indicated they are going to pursue claims for certain sales to California, Florida, and New York as well as sales to the federal government through reseller GSA Schedule contracts, which could significantly increase our potential damages exposure.
In 2012, a sealed civil lawsuit was filed against us related to compliance with the GSA Schedule contract and contracts with California, Florida, and New York. On July 18, 2014, the Court-imposed seal expired, and the government intervened in the lawsuit. On September 16, 2014, the states of California and Florida intervened in the lawsuit, and the state of New York notified the Court that it would not intervene. On October 3, 2014, the DOJ filed an amended complaint, which did not state a specific damages amount. On October 17, 2014, California and Florida combined their claims with those of the DOJ and the relator on behalf of New York in an Omnibus Complaint, and a First Amended Omnibus Complaint was filed on October 8, 2015; the state claims also do not state specific damages amounts. On June 6, 2019, we filed a motion seeking summary judgment on all claims asserted by all plaintiffs, and the plaintiffs filed a motion for partial summary judgment on elements of liability on their claims. Both motions are currently pending before the court and Symantec is currently unable to forecast the likely outcome of these motions.
It is possible that the litigation could lead to claims or findings of violations of the False Claims Act and could be material to our results of operations and cash flows for any period. Resolution of False Claims Act investigations can ultimately result in the payment of somewhere between one and three times the actual damages proven by the government, plus civil penalties in some cases, depending upon a number of factors. Our current estimate of the low end of the range of the probable estimated loss from this matter is $25 million, which we have accrued. This amount contemplates estimated losses from both the investigation of compliance with the terms of the GSA Schedule contract as well as possible violations of the False Claims Act. There is at least a reasonable possibility that a loss may have been incurred in excess of our accrual for this matter, however, we are currently unable to determine the high end of the range of estimated losses resulting from this matter.
Avila v. LifeLock et al
On August 29, 2019 the Ninth Circuit issued a mandate remanding a securities class action lawsuit, originally filed on July 22, 2015, against our subsidiary, LifeLock, as well as certain of LifeLock’s former officers (the “LifeLock Defendants”) for further proceedings in the U.S. District Court for the District of Arizona. The Ninth Circuit had affirmed in part and reversed in part the August 21, 2017 decision of the District Court, which had dismissed the case with prejudice. The complaint in the remanded action alleges that, during a purported class period of July 30, 2014 to July 21, 2015, a period that predates LifeLock’s acquisition by us, the LifeLock Defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of the Securities Exchange Act. The case is now back in the U.S. District Court for further proceedings.
Other
We are involved in a number of other judicial and administrative proceedings that are incidental to our business. Although adverse decisions (or settlements) may occur in one or more of the cases, it is not possible to estimate the possible loss or losses from each of these cases. The final resolution of these lawsuits, individually or in the aggregate, is not expected to have a material adverse effect on our business, results of operations, financial condition or cash flows.
Note 18. Subsequent Events
Sale of equity method investment
On October 16, 2019, Clearlake Capital Group, L.P. (Clearlake), a private investment firm, and TA Associates, an existing investor of DigiCert and a private equity firm, completed an investment in DigiCert. As a part of the transaction, Clearlake and TA became equal partners in DigiCert. As a result, we received $378 million in cash for our equity investment in DigiCert. We expect to make income tax payments of approximately $55 million as a result of the transaction. As a result of the transaction, we expect to recognize a gain of approximately $310 million to $320 million, net of taxes.
Divestiture of Enterprise Security business
On November 4, 2019, we completed the sale of certain assets and the assumption of certain liabilities of our Enterprise Security business to Broadcom for a purchase price of $10.7 billion. In connection with the transaction, we expect to incur direct costs of $35 million to $40 million. We expect to pay $2.2 billion to $2.6 billion in U.S. and foreign income taxes as a result of the transaction. As a result of the transaction, we expect to recognize a gain of approximately $2 billion to $3 billion, net of taxes. We expect to distribute the net proceeds from the Broadcom sale to our stockholders through a special dividend in the fourth quarter of our 2020 fiscal year.
In connection with the Broadcom sale, we entered into a transition services agreement under which we will provide assistance to Broadcom including, but not limited to, business support services and information technology services for a period of six months.
New debt financing
On November 4, 2019, we entered into a credit agreement with financial institutions, which provides a revolving line of credit of $1,000 million through October 2024, a 5-year term loan of $500 million, and a delayed 5-year term loan commitment of $750 million through September 15, 2020. Interest on borrowings under the credit agreement can be based on a base rate or a London interbank offered rate (LIBOR) at our election. Based on our debt ratings and our consolidated leverage ratios as determined in accordance with the credit agreement, loans borrowed bear interest, in the case of base rate loans, at a per annum rate equal to the applicable base rate plus a margin ranging from 0.125% to 0.75%, and in the case of LIBOR loans, LIBOR plus a margin ranging from 1.125% to 1.75%. The unused revolving line of credit is subject to a commitment fee ranging from 0.125% to 0.30% per annum. The principal amount of the term loan is repayable in quarterly installments on the last business day of each calendar quarter commencing with the quarter ended March 31, 2021 in an amount equal to 1.25% of the aggregate principal amount of the term loan and in the outstanding principal amount upon the October 2024 maturity date.
The credit agreement contains customary representations and warranties, non-financial covenants for financial reporting, affirmative and negative covenants, including a covenant that we maintain a consolidated leverage ratio of not more than 5.25 to 1.0, or 5.75 to 1.0 if we acquire assets or business in an aggregate amount greater than $250 million, and restrictions on subsidiary indebtedness, liens, stock repurchases, and dividends (with exceptions permitting our regular quarterly dividend).
Dividends
On November 7, 2019, we announced a cash dividend of $0.125 per share of common stock to be paid in December 2019. All shares of common stock issued and outstanding and all RSUs and PRUs as of the record date will be entitled to the dividend and dividend equivalents, respectively. Any future dividends and dividend equivalents will be subject to the approval of our Board of Directors.
November 2019 Restructuring Plan
On November 5, 2019, in connection with the strategic decision to divest our enterprise business, our Board of Directors approved a restructuring plan (the November 2019 Plan). Actions under this plan will include the reduction of our workforce by approximately 3,100 employees, as well as asset impairments, contract terminations, facilities closures, and the sale of underutilized facilities. We estimate that we will incur total costs of $800 million in connection with the November 2019 Plan of
which approximately $350 million are expected to consist of cash expenditures for severance and termination benefits. These actions are expected to be completed within the next twelve months.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements and factors that may affect future results
The discussion below contains forward-looking statements, which are subject to safe harbors under the Securities Act of 1933, as amended (the Securities Act) and the Exchange Act of 1934, as amended (the Exchange Act). Forward-looking statements include references to our ability to utilize our deferred tax assets, as well as statements including words such as “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “goal,” “intent,” “momentum,” “projects,” and similar expressions. In addition, projections of our future financial performance; anticipated growth and trends in our businesses and in our industries; the anticipated impacts of acquisitions, restructurings, stock repurchases, and investment activities; the outcome or impact of pending litigation, claims or disputes; our intent to pay quarterly cash dividends in the future; plans for and anticipated benefits of our solutions; matters arising out of the ongoing U.S. Securities and Exchange Commission (the SEC) investigation; and other characterizations of future events or circumstances are forward-looking statements. These statements are only predictions, based on our current expectations about future events and may not prove to be accurate. We do not undertake any obligation to update these forward-looking statements to reflect events occurring or circumstances arising after the date of this report. These forward-looking statements involve risks and uncertainties, and our actual results, performance, or achievements could differ materially from those expressed or implied by the forward-looking statements on the basis of several factors, including those that we discuss in Part II Item 1A, of this quarterly report on Form 10-Q. We encourage you to read that section carefully.
OVERVIEW
NortonLifeLock Inc. is a global leader in consumer cyber safety. Our Norton LifeLock branded solutions help consumers protect their devices, online privacy, identity, and home networks.
On August 8, 2019, we entered into a definitive agreement with Broadcom Inc. (Broadcom) under which Broadcom agreed to purchase certain of our Enterprise Security assets and assume certain liabilities for a purchase price of $10.7 billion (the Broadcom sale). On November 4, 2019, we completed the transaction.
The divestiture of our Enterprise Security business allows us to shift our operational focus to our consumer business and represents a strategic shift in our operations. As a result, the results of our Enterprise Security business were classified as discontinued operations in our Condensed Consolidated Statements of Operations and thus excluded from both continuing operations and segment results for all periods presented. Starting in the second quarter of fiscal 2020, we operate in one reportable segment. The Enterprise Security business was part of our Enterprise Security Segment. Revenues and associated costs of our ID Analytics solutions, which were formerly included in the Enterprise Security segment, are now included in our remaining reportable segment.
In connection with the Broadcom sale, effective November 4, 2019, we changed our corporate name from Symantec Corporation to NortonLifeLock Inc.
Fiscal calendar
We have a 52/53-week fiscal year ending on the Friday closest to March 31. The second quarter of fiscal 2020 and fiscal 2019 both consisted of 13 weeks. The three and six months ended October 4, 2019 consisted of 13 and 27 weeks, respectively, whereas the three and six months ended September 28, 2018 consisted of 13 and 26 weeks, respectively. Our 2020 fiscal year consists of 53 weeks and ends on April 3, 2020.
Key financial metrics
The following tables provide our key financial metrics for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions, except for per share amounts)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Net revenues
|
$
|
608
|
|
|
$
|
612
|
|
|
$
|
1,258
|
|
|
$
|
1,224
|
|
Operating income
|
$
|
103
|
|
|
$
|
43
|
|
|
$
|
237
|
|
|
$
|
14
|
|
Income (loss) from continuing operations, net of taxes
|
$
|
35
|
|
|
$
|
(62
|
)
|
|
$
|
70
|
|
|
$
|
(134
|
)
|
Income from discontinued operations, net of taxes
|
$
|
750
|
|
|
$
|
54
|
|
|
$
|
741
|
|
|
$
|
66
|
|
Net income (loss)
|
$
|
785
|
|
|
$
|
(8
|
)
|
|
$
|
811
|
|
|
$
|
(68
|
)
|
Net income (loss) per share from continuing operations - diluted
|
$
|
0.05
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.21
|
)
|
Net income (loss) per share from discontinued operations - diluted
|
$
|
1.16
|
|
|
$
|
0.09
|
|
|
$
|
1.15
|
|
|
$
|
0.11
|
|
Net income (loss) per share - diluted
|
$
|
1.22
|
|
|
$
|
(0.01
|
)
|
|
$
|
1.26
|
|
|
$
|
(0.11
|
)
|
Cash provided by operating activities
|
|
|
|
|
$
|
506
|
|
|
$
|
571
|
|
|
|
|
|
|
|
|
|
|
|
As Of
|
(In millions)
|
October 4, 2019
|
|
March 29, 2019
|
Cash, cash equivalents and short-term investments
|
$
|
1,831
|
|
|
$
|
2,043
|
|
Contract liabilities
|
$
|
1,016
|
|
|
$
|
1,059
|
|
Below are our financial highlights for the second quarter of fiscal 2020, compared to the corresponding period in the prior year:
|
|
•
|
Net revenues were relatively flat.
|
|
|
•
|
Operating income increased $60 million primarily due to lower restructuring, transition and other expense, partially offset by higher advertisement and promotion costs.
|
|
|
•
|
Income (loss) from continuing operations, net of taxes, increased $97 million primarily due to lower operating expenses.
|
|
|
•
|
Income from discontinued operations, net of taxes, increased $696 million primarily due to higher income tax benefits.
|
|
|
•
|
Net income and net income per share increased primarily due to higher income from both our continuing operations and discontinued operations, net of taxes.
|
Below are our financial highlights for the first six months of fiscal 2020, compared to the corresponding period in the prior year unless stated otherwise:
|
|
•
|
Net revenues increased 3% primarily due to the favorable impact from the additional week in the first six months of fiscal 2020.
|
|
|
•
|
Operating income increased $223 million primarily due to revenue recognized in the additional week in the first six months of fiscal 2020, lower restructuring, transition and other expense, and lower stock-based compensation expense.
|
|
|
•
|
Income (loss) from continuing operations, net of taxes, increased $204 million primarily due to the higher operating income, partially offset by higher income tax expense.
|
|
|
•
|
Income from discontinued operations, net of taxes, increased $675 million primarily due to higher income tax benefits.
|
|
|
•
|
Net income and net income per share increased primarily due to higher income from both our continuing operations and discontinued operations, net of taxes.
|
|
|
•
|
Net cash provided by operating activities decreased $65 million primarily due to unfavorable net changes in operating assets and liabilities, partially offset by higher net income adjusted for non-cash items.
|
|
|
•
|
Cash, cash equivalents and short-term investments decreased by $212 million compared to March 29, 2019, primarily due to stock repurchases and payments of dividends, partially offset by cash from operations.
|
|
|
•
|
Contract liabilities decreased $43 million compared to March 29, 2019, primarily due to lower billings than recognized revenue during the period.
|
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Condensed Consolidated Financial Statements and related notes in accordance with generally accepted accounting principles in the U.S. requires us to make estimates, including judgments and assumptions that affect the
reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates on a regular basis and make changes accordingly. Management believes that the accounting estimates employed and the resulting amounts are reasonable; however, actual results may differ from these estimates. Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on our results of operations, financial position and cash flows.
Our critical accounting policies and estimates were disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 29, 2019. There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the six months ended October 4, 2019, except for those related to discontinued operations as a result of changes in reporting that relate to the Broadcom sale.
Discontinued Operations. We review the presentation of planned business dispositions in the Condensed Consolidated Financial Statements based on the available information and events that have occurred. The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results. In addition, we evaluate whether the business has met the criteria as a business held for sale. In order for a planned disposition to be classified as a business held for sale, the established criteria must be met as of the reporting date, including an active program to market the business and the expected disposition of the business within one year.
Planned business dispositions are presented as discontinued operations when all the criteria described above are met. For those divestitures that qualify as discontinued operations, all comparative periods presented are reclassified in the Condensed Consolidated Balance Sheet. Additionally, the results of operations of a discontinued operation are reclassified to income from discontinued operations, net of tax, for all periods presented. Results of discontinued operations include all revenues and expenses directly derived from such businesses; general corporate overhead is not allocated to discontinued operations. See Note 3 - Discontinued Operations in our Notes to Condensed Consolidated Financial statements for the carrying value of discontinued operations held for sale assets and liabilities and additional information.
RESULTS OF OPERATIONS
The following table sets forth our Condensed Consolidated Statements of Operations data as a percentage of net revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Net revenues
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost of revenues
|
16
|
|
|
19
|
|
|
16
|
|
|
18
|
|
Gross profit
|
84
|
|
|
81
|
|
|
84
|
|
|
82
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Sales and marketing
|
31
|
|
|
29
|
|
|
30
|
|
|
30
|
|
Research and development
|
14
|
|
|
17
|
|
|
15
|
|
|
17
|
|
General and administrative
|
15
|
|
|
17
|
|
|
15
|
|
|
18
|
|
Amortization of intangible assets
|
3
|
|
|
3
|
|
|
3
|
|
|
3
|
|
Restructuring, transition and other costs
|
3
|
|
|
8
|
|
|
2
|
|
|
11
|
|
Total operating expenses
|
67
|
|
|
74
|
|
|
65
|
|
|
80
|
|
Operating income
|
17
|
|
|
7
|
|
|
19
|
|
|
1
|
|
Interest expense
|
(8
|
)
|
|
(8
|
)
|
|
(8
|
)
|
|
(8
|
)
|
Other expense, net
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(3
|
)
|
Income (loss) from continuing operations before income taxes
|
9
|
|
|
(5
|
)
|
|
11
|
|
|
(10
|
)
|
Income tax expense
|
3
|
|
|
5
|
|
|
6
|
|
|
—
|
|
Income (loss) from continuing operations
|
6
|
|
|
(10
|
)
|
|
6
|
|
|
(11
|
)
|
Income from discontinued operations, net of taxes
|
123
|
|
|
9
|
|
|
59
|
|
|
5
|
|
Net income (loss)
|
129
|
%
|
|
(1
|
)%
|
|
64
|
%
|
|
(6
|
)%
|
Percentages may not add due to rounding.
Net revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions, except for percentages)
|
October 4, 2019
|
|
September 28, 2018
|
|
Change in %
|
|
October 4, 2019
|
|
September 28, 2018
|
|
Change in %
|
Net revenues
|
$
|
608
|
|
|
$
|
612
|
|
|
(1
|
)%
|
|
$
|
1,258
|
|
|
$
|
1,224
|
|
|
3
|
%
|
Performance Metrics
We regularly monitor a number of metrics in order to measure our current performance and estimate our future performance. Our metrics may be calculated in a manner different than similar metrics used by other companies.
The following table summarizes supplemental key performance metrics for our consumer solutions:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(In millions, except for per user amounts)
|
October 4, 2019
|
|
September 28, 2018
|
Direct customer revenues
|
$
|
536
|
|
|
$
|
543
|
|
Average direct customer count
|
20.1
|
|
|
20.8
|
|
Direct customer count (at quarter end)
|
20.1
|
|
|
20.7
|
|
Direct average revenue per user (ARPU)
|
$
|
8.88
|
|
|
$
|
8.72
|
|
We define direct customer revenues as revenues from sales of our consumer solutions to direct customers, which we define as those customers who have a direct billing relationship with us. Such customer sources include online acquisition and retention, affiliates, co-marketing, and original contract manufacturer channels. Direct customers exclude customers of our partners and ID Analytics solutions and direct customer revenues excludes partner revenues and ID Analytics revenues. For the three months ended October 4, 2019 partner revenues and ID Analytics revenues were $59 million and $13 million, respectively. For the three months ended September 28, 2018 partner revenues and ID Analytics revenues were $58 million and $11 million, respectively.
Average direct customer count presents the average of the total number of direct customers at the beginning and end of the fiscal quarter.
ARPU is calculated as estimated direct customer revenues for the period divided by the average direct customer count for the same period, expressed as a monthly figure. We monitor APRU because it helps us understand the rate at which we are monetizing our consumer customer base.
Net revenues by geographical region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Americas
|
74
|
%
|
|
73
|
%
|
|
74
|
%
|
|
72
|
%
|
EMEA
|
15
|
%
|
|
16
|
%
|
|
15
|
%
|
|
16
|
%
|
APJ
|
11
|
%
|
|
11
|
%
|
|
11
|
%
|
|
11
|
%
|
Percentages may not add to 100% due to rounding.
The Americas include the U.S., Canada and Latin America; EMEA includes Europe, the Middle East and Africa; APJ includes Asia Pacific and Japan.
Three Months Ended October 4, 2019 Compared with Three Months Ended September 28, 2018
Net revenues were relatively flat, as our average direct customer count decline was partially offset by an increase in our ARPU.
Six Months Ended October 4, 2019 Compared with Six Months Ended September 28, 2018
Net revenues increased $34 million compared to the corresponding period in fiscal 2019 primarily due to approximately $44 million of revenue from the additional week in the first six months of fiscal 2020.
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions, except for percentages)
|
October 4, 2019
|
|
September 28, 2018
|
|
Change in %
|
|
October 4, 2019
|
|
September 28, 2018
|
|
Change in %
|
Cost of revenues
|
$
|
100
|
|
|
$
|
116
|
|
|
(14
|
)%
|
|
$
|
200
|
|
|
$
|
226
|
|
|
(12
|
)%
|
Three Months Ended October 4, 2019 Compared with Three Months Ended September 28, 2018
Our cost of revenues decreased $16 million primarily due to inventory write-offs of $10 million in the second quarter of fiscal 2019 which did not recur in fiscal 2020 and an $8 million decrease in technical support costs in the second quarter of fiscal 2020 compared to the corresponding period in the prior year.
Six Months Ended October 4, 2019 Compared with Six Months Ended September 28, 2018
Our cost of revenues decreased $26 million primarily due to inventory write-offs of $13 million in the first six months of fiscal 2019 and a $14 million decrease in technical support costs in the first six months of fiscal 2020 compared to the corresponding period in the prior year.
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions, except for percentages)
|
October 4, 2019
|
|
September 28, 2018
|
|
Change in %
|
|
October 4, 2019
|
|
September 28, 2018
|
|
Change in %
|
Sales and marketing
|
$
|
189
|
|
|
$
|
175
|
|
|
8
|
%
|
|
$
|
374
|
|
|
$
|
373
|
|
|
—
|
%
|
Research and development
|
86
|
|
|
105
|
|
|
(18
|
)%
|
|
188
|
|
|
214
|
|
|
(12
|
)%
|
General and administrative
|
92
|
|
|
101
|
|
|
(9
|
)%
|
|
188
|
|
|
220
|
|
|
(15
|
)%
|
Amortization of intangible assets
|
21
|
|
|
20
|
|
|
5
|
%
|
|
41
|
|
|
40
|
|
|
3
|
%
|
Restructuring, transition and other costs
|
17
|
|
|
52
|
|
|
(67
|
)%
|
|
30
|
|
|
137
|
|
|
(78
|
)%
|
Total operating expenses
|
$
|
405
|
|
|
$
|
453
|
|
|
(11
|
)%
|
|
$
|
821
|
|
|
$
|
984
|
|
|
(17
|
)%
|
Three Months Ended October 4, 2019 Compared with Three Months Ended September 28, 2018
Sales and marketing expense increased $14 million primarily due to a $30 million increase in advertising and promotional expense, partially offset by $5 million decrease in stock-based compensation expense.
Research and development expense decreased $19 million primarily due to an $8 million decrease in outside services and a $7 million decrease in compensation expenses other than stock-based compensation expense.
General and administrative expense decreased $9 million primarily due to a $14 million decrease in outside services.
Restructuring, transition and other costs decreased $35 million primarily due to a $51 million decrease in transition related projects costs, partially offset by a $17 million increase in severance costs.
Six Months Ended October 4, 2019 Compared with Six Months Ended September 28, 2018
Sales and marketing expense increased $1 million primarily due to a $9 million increase advertising and promotional expense, partially offset by a $9 million decrease in stock-based compensation expense.
Research and development expense decreased $26 million primarily due to a $10 million decrease in outside services and a $7 million decrease in compensation expenses other than stock-based compensation.
General and administrative expense decreased $32 million primarily due to a $21 million decrease in stock-based compensation expense and a $15 million decrease in outside services, partially offset by a $11 million increase in compensation expenses other than stock-based compensation.
Restructuring, transition and other costs decreased $107 million primarily due to a $119 million decrease in transition related projects costs, partially offset by a $23 million increase in severance costs.
Non-operating expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Interest expense
|
$
|
(46
|
)
|
|
$
|
(52
|
)
|
|
$
|
(95
|
)
|
|
$
|
(104
|
)
|
Interest income
|
8
|
|
|
11
|
|
|
18
|
|
|
18
|
|
Loss from equity interest
|
(11
|
)
|
|
(34
|
)
|
|
(22
|
)
|
|
(60
|
)
|
Foreign exchange gain (loss)
|
1
|
|
|
(4
|
)
|
|
(2
|
)
|
|
(9
|
)
|
Other
|
—
|
|
|
4
|
|
|
4
|
|
|
13
|
|
Total non-operating expense, net
|
$
|
(48
|
)
|
|
$
|
(75
|
)
|
|
$
|
(97
|
)
|
|
$
|
(142
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions, except for percentages)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Income (loss) from continuing operations before income taxes
|
$
|
55
|
|
|
$
|
(32
|
)
|
|
$
|
140
|
|
|
$
|
(128
|
)
|
Income tax expense
|
$
|
20
|
|
|
$
|
30
|
|
|
$
|
70
|
|
|
$
|
6
|
|
Effective tax rate
|
36
|
%
|
|
(94
|
)%
|
|
50
|
%
|
|
(5
|
)%
|
Our effective tax rate for continuing operations for fiscal 2020 was based on the statutory tax rate of 21%. Our effective tax rate for continuing operations for the second quarter and the first six months of fiscal 2020 differs from the federal statutory income tax rate primarily due to various permanent differences, and state taxes, partially offset by the benefits of lower-taxed international earnings and the research and development tax credit. In addition, for the first six months of fiscal 2020, there was additional tax expense recorded to account for uncertain tax positions related to the Ninth Circuit's recent holding in Altera Corp. v. Commissioner.
Our effective tax rate for income (loss) from continuing operations for the second quarter and the first six months of fiscal 2019 differs from the federal statutory income tax rate primarily due to tax expense recorded to account for one-time adjustments for guidance issued on Tax Cuts and Jobs Act (H.R.1) (Tax Reform) and other changes in response to the Tax Reform, various permanent differences, and state taxes, partially offset by the benefits of lower-taxed international earnings and the research and development tax credit.
We are a U.S.-based multinational company subject to tax in multiple U.S. and international tax jurisdictions. A substantial portion of our international earnings were generated from subsidiaries organized in Ireland and Singapore. Our results of operations would be adversely affected to the extent that our geographical mix of income becomes more weighted toward jurisdictions with higher tax rates and would be favorably affected to the extent the relative geographic mix shifts to lower tax jurisdictions. Any change in our mix of earnings is dependent upon many factors and is therefore difficult to predict.
The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Although potential resolution of uncertain tax positions involves multiple tax periods and jurisdictions, it is reasonably possible that the gross unrecognized tax benefits related to these audits could decrease, whether by payment, release, or a combination of both, in the next 12 months by $30 million, which could reduce our income tax provision and therefore benefit the resulting effective tax rate.
We continue to monitor the progress of ongoing income tax controversies and the impact, if any, of the expected expiration of the statute of limitations in various taxing jurisdictions.
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
|
October 4, 2019
|
|
September 28, 2018
|
Net revenues
|
$
|
576
|
|
|
$
|
567
|
|
|
$
|
1,173
|
|
|
$
|
1,116
|
|
Operating income
|
$
|
113
|
|
|
$
|
63
|
|
|
$
|
136
|
|
|
$
|
99
|
|
Income before income taxes
|
$
|
113
|
|
|
$
|
63
|
|
|
$
|
137
|
|
|
$
|
95
|
|
Income tax expense (benefit)
|
$
|
(637
|
)
|
|
$
|
9
|
|
|
$
|
(604
|
)
|
|
$
|
29
|
|
Income from discontinued operations, net of taxes
|
$
|
750
|
|
|
$
|
54
|
|
|
$
|
741
|
|
|
$
|
66
|
|
Three Months Ended October 4, 2019 Compared with Three Months Ended September 28, 2018
Income from discontinued operations, net of taxes increased $696 million primarily as a result of a $665 million tax benefit in discontinued operations during the second quarter of fiscal 2020 to remeasure the deferred tax assets associated with the tax basis of intellectual property held by our subsidiaries organized in Ireland. We previously expected to recover the tax basis through normal operation of our Enterprise business, which is taxed at the Irish trading rate of 12.5%. We now expect to recover the tax basis through the sale of certain assets of our Enterprise business, which will be taxed at the Irish capital gains tax rate of 33%. The impact of the tax benefit was partially offset by a $36 million increase in restructuring, transition and other costs.
Six Months Ended October 4, 2019 Compared with Six Months Ended September 28, 2018
Income from discontinued operations, net of taxes increased $675 million primarily due to a $633 million increase in income tax benefit as a result of the $665 tax benefit discussed above and a $57 million increase in net revenues, partially offset by a $37 million increase in restructuring, transition and other costs.
LIQUIDITY, CAPITAL RESOURCES AND CASH REQUIREMENTS
Liquidity
We have historically relied on cash generated from operations, borrowings under credit facilities, issuances of debt, and proceeds from divestitures for our liquidity needs.
As of October 4, 2019, we had cash, cash equivalents and short-term investments of $1.8 billion, of which $0.4 billion was held by our foreign subsidiaries. Our cash, cash equivalents and short-term investments are managed with the objective to preserve principal, maintain liquidity, and generate investment returns. The participation exemption system under current U.S. federal tax regulations generally allows us to make distributions of non-U.S. earnings to the U.S. without incurring additional U.S. federal tax, however these distributions may be subject to applicable state or non-U.S. taxes. We have not recognized deferred income taxes for local country income and withholding taxes that could be incurred on distributions of certain non-U.S. earnings or for outside basis differences in our subsidiaries, because we plan to indefinitely reinvest such earnings and basis differences.
We also have an undrawn credit facility of $1.0 billion under a new financing arrangement discussed below which expires in October 2024.
Our principal cash requirements are primarily to meet our working capital needs, support on-going business activities, including the payment of taxes, fund capital expenditures, payments of cash dividends, service existing debt, and invest in business acquisitions. As a part of our plan to deleverage our balance sheet, we may from time to time make optional repayments of our debt obligations, which may include repurchases of our outstanding debt, depending on various factors such as market conditions.
Our capital allocation strategy is to balance driving stockholder returns, managing financial risk, and preserving our flexibility to pursue strategic options, including acquisitions. Historically this has included a quarterly cash dividend, the repayment of debt and the repurchase of our common stock.
Sale of equity method investment
On October 16, 2019, Clearlake Capital Group, L.P. (Clearlake), a private investment firm, and TA Associates, an existing investor of DigiCert and a private equity firm, completed an investment in DigiCert. As a part of the transaction, Clearlake and TA became equal partners in DigiCert. As a result, we received $378 million in cash for our equity investment in DigiCert. We expect to make income tax payments of approximately $55 million as a result of the transaction.
Divestiture of Enterprise Security business
On November 4, 2019, we completed the sale of certain assets and the assumption of certain liabilities of our Enterprise Security business to Broadcom for a purchase price of $10.7 billion. In connection with the transaction, we expect to incur direct costs of approximately $35 million to $40 million. We expect to pay $2.2 billion to $2.6 billion for U.S. and foreign income taxes as a result of the transaction. We expect to distribute the net proceeds from the Broadcom sale to our stockholders through a special dividend in the fourth quarter of our fiscal 2020.
Cash flows
The following summarizes our cash flow activities:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
(In millions)
|
October 4, 2019
|
|
September 28, 2018
|
Net cash provided by (used in):
|
|
|
|
Operating activities
|
$
|
506
|
|
|
$
|
571
|
|
Investing activities
|
$
|
39
|
|
|
$
|
(20
|
)
|
Financing activities
|
$
|
(634
|
)
|
|
$
|
(157
|
)
|
See Note 3 to the Condensed Consolidated Financial Statements for additional cash flow information associated with our discontinued operations.
Cash from operating activities
Our cash flows for the first six months of fiscal 2020 reflected net income of $811 million, adjusted by non-cash items, including a deferred income tax benefit of $707 million, amortization and depreciation of $251 million, and stock-based compensation expense of $150 million, compared to a net loss of $68 million adjusted by non-cash items, including amortization and depreciation of $305 million, and stock-based compensation expense of $210 million for the first six months of fiscal 2019.
Changes in operating assets and liabilities in the first six months of fiscal 2020 consisted primarily of the following:
Accounts receivable decreased $111 million, compared to $286 million in the first six months of fiscal 2019, primarily due to seasonally higher collections than billings during the period.
Contract liabilities decreased $129 million, compared to $116 million in the first six months of fiscal 2019, primarily due to seasonally higher recognized revenue than billings during the period.
Cash from investing activities
Our investing activities in the first six months of fiscal 2020 consisted primarily of cash proceeds from maturities and sales of short-term investments of $120 million partially offset by capital expenditures of $76 million, while our investing activities in the first six months of fiscal 2019 consisted primarily of capital expenditures of $95 million, partially offset by cash proceeds from maturities and sales of short-term investments of $99 million.
Cash from financing activities
Our financing activities in the first six months of fiscal 2020 included common stock repurchases of $559 million, payments of dividends and dividend equivalents of $98 million and tax withholding payments related to restricted stock units (RSUs) of $65 million, partially offset by net proceeds from sales of common stock under employee stock incentive plans of $68 million. Our financing activities in the first six months of fiscal 2019 included payment of dividends and dividend equivalents of $110 million and tax withholding payments related to RSUs of $53 million.
Our financing activities in the first six months of fiscal 2020 included purchases of property and equipment related to discontinued operations of $29 million, compared to $16 million for the first six months of fiscal 2019.
Cash requirements
Debt - As of October 4, 2019, our total outstanding principal amount of indebtedness was $4.5 billion, summarized as follows. See Note 9 to the Condensed Consolidated Financial Statements for further information on our debt.
|
|
|
|
|
(In millions)
|
October 4, 2019
|
Senior Term Loans
|
$
|
500
|
|
Senior Notes
|
2,250
|
|
Convertible Senior Notes
|
1,750
|
|
Total debt
|
$
|
4,500
|
|
Debt covenant compliance. The Senior Term Loan A-5 agreement contains customary representations and warranties, non-financial covenants for financial reporting, and affirmative and negative covenants, including compliance with specified financial ratios. As of October 4, 2019, we were in compliance with all debt covenants.
On November 4, 2019, we entered into a credit agreement with financial institutions which provides a revolving line of credit of $1.0 billion through October 2024, a 5-year term loan of $500 million, and a delayed draw 5-year term loan commitment of $750 million through September 15, 2020. Interest on borrowings under the credit agreement can be based on a base rate or a London interbank offered rate at our election, in each case plus a margin that varies based on our ratio of debt to adjusted EBITDA and debt ratings. The principal amount of the term loan is repayable in quarterly installments on the last business day of each calendar quarter commencing with the quarter ended March 31, 2021 in an amount equal to 1.25% of the aggregate principal amount of the term loan and in the outstanding principal amount upon the October 2024 maturity date.
In connection with the credit agreement, on November 4, 2019, we fully prepaid the principal amount of $500 million of our Senior Term Loan A-5 and terminated our existing revolving line of credit.
In our second quarter of fiscal 2021, we plan to borrow under the delayed draw term loan of $750 million, which will mature in October 2024 and to use the proceeds to repay our 4.2% Senior Notes, which are due in September 2020.
Dividends. On November 7, 2019, we announced a cash dividend of $0.125 per share of common stock to be paid in December 2019. All shares of common stock issued and outstanding and all RSUs and performance-based restricted stock units as of the record date will be entitled to the dividends and dividend equivalents, respectively. Any future dividends will be subject to the approval of our Board of Directors.
Stock repurchases. Under our stock repurchase program, we may purchase shares of our outstanding common stock through accelerated stock repurchase transactions, open market transactions (including through trading plans intended to qualify under Rule 10b5-1 under the Exchange Act) and privately-negotiated transactions. As of October 4, 2019, the remaining balance of our stock repurchase authorization was $1.6 billion and does not have an expiration date. The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, and other investment opportunities.
November 2019 Restructuring Plan
On November 5, 2019, in connection with the strategic decision to divest our enterprise business, our Board of Directors approved a restructuring plan (the November 2019 Plan). Actions under this plan will include the reduction of our workforce by approximately 3,100 employees, as well as asset impairments, contract terminations, facilities closures, and the sale of underutilized facilities. We estimate that we will incur total costs of $800 million in connection with the November 2019 Plan of which approximately $350 million are expected to consist of cash expenditures for severance and termination benefits. We expect these costs to be partially offset by proceeds from the sale of real estate and other assets, in addition to the $378 million of proceeds from the sale of our equity investment discussed above. These actions are expected to be completed within the next twelve months.
Contractual obligations
The following is a schedule of our significant contractual obligations as of October 4, 2019, including those associated with our discontinued operations. The expected timing of payments of the obligations in the following table is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
(In millions)
|
Total
|
|
Less than 1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
Thereafter
|
Debt (1)
|
$
|
4,500
|
|
|
$
|
750
|
|
|
$
|
2,650
|
|
|
$
|
—
|
|
|
$
|
1,100
|
|
Interest payments on debt (2)
|
519
|
|
|
163
|
|
|
191
|
|
|
110
|
|
|
55
|
|
Purchase obligations (3)
|
983
|
|
|
560
|
|
|
315
|
|
|
98
|
|
|
10
|
|
Deemed repatriation taxes (4)
|
703
|
|
|
65
|
|
|
260
|
|
|
378
|
|
|
—
|
|
Operating leases (5)
|
218
|
|
|
52
|
|
|
83
|
|
|
52
|
|
|
31
|
|
Total
|
$
|
6,923
|
|
|
$
|
1,590
|
|
|
$
|
3,499
|
|
|
$
|
638
|
|
|
$
|
1,196
|
|
|
|
(1)
|
On November 4, 2019, we entered into a new credit facility, which provides for a revolving line of credit of $1,000 million through October 2024, a 5- year team loan of $500 million, and a delayed draw 5-year term loan commitment of $750 million through September 15, 2020. In connection therewith, we fully prepaid the principal amount of $500 million of our Senior Term Loan A-5 and terminated our existing revolving line of credit. In our second quarter of fiscal 2021, we plan to borrow under the delayed draw term loan of $750 million, which will mature in October 2024 and to use the proceeds to repay our 4.2% Senior Notes, which are due in September 2020.
|
|
|
(2)
|
Interest payments were calculated based on the contractual terms of the related Senior Notes, Convertible Senior Notes and Senior Term Facilities. Interest on variable rate debt was calculated using the interest rate in effect as of October 4, 2019. See Note 9 to the Condensed Consolidated Financial Statements for further information on the Senior Notes, Convertible Senior Notes and Senior Term Facility.
|
|
|
(3)
|
These amounts are associated with agreements for purchases of goods or services generally including agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. The table above also includes agreements to purchase goods or services that have cancellation provisions requiring little or no payment. The amounts under such contracts are included in the table above because management believes that cancellation of these contracts is unlikely, and we expect to make future cash payments according to the contract terms or in similar amounts for similar materials.
|
|
|
(4)
|
These amounts represent the transition tax on previously untaxed foreign earnings of foreign subsidiaries under the Tax Cuts and Jobs Act (H.R.1) which may be paid in installments through July 2025.
|
|
|
(5)
|
We have entered into various non-cancelable operating lease agreements that expire on various dates through fiscal 2029. See Note 5 to the Condensed Consolidated Financial Statements for further information on leases.
|
Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits and other long-term taxes as of October 4, 2019 we are unable to make reasonably reliable estimates of the period of cash settlement with
the respective taxing authorities. Therefore, $431 million in long-term income taxes payable has been excluded from the contractual obligations table. See Note 12 to the Condensed Consolidated Financial Statements for further information.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, subsidiaries, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of agreements or representations and warranties made by us. See Note 17 to the Condensed Consolidated Financial Statements for further information on our indemnifications.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes to our market risk exposures during the first six months of fiscal 2020, as compared to those discussed in Quantitative and Qualitative Disclosures About Market Risk, set forth in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended March 29, 2019.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The SEC defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. “Disclosure controls and procedures” include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our management (with the participation of our Chief Executive Officer and Chief Financial Officer) has conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act). Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the second quarter of fiscal 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c) Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.