GEN DIGITAL INC.
Please read the following discussion and analysis of our financial condition and
results of operations together with our Consolidated Financial Statements and
related Notes thereto included under Item 15 of this Annual Report on Form 10-K.
OVERVIEW
We are a leading provider of Cyber Safety solutions for consumers. During fiscal
year 2020, we completed the sale of our Enterprise Security assets to Broadcom
Inc. (Broadcom) and the sale of our ID Analytics solutions to LexisNexis Risk
Solutions , part of RELX Inc. With the sale of our enterprise assets, we have
transformed ourselves into a pure consumer company. Our NortonLifeLock branded
solutions help customers protect their devices, online privacy, identity and
home networks.
Fiscal Year Highlights
• In October 2019 , we sold our equity interest in DigiCert Parent Inc. for $380 million and realized a gain of
• On
purchased certain of our Enterprise Security assets and assumed certain
liabilities for a purchase price of
gain of
The divestiture of our Enterprise Security business allowed us to shift our operational focus to our consumer business and represented a strategic shift in our operations. As a result, the results of our Enterprise Security business are classified as discontinued operations in our Consolidated Statements of Operations and thus are excluded from both continuing operations for all periods presented. Accordingly, we now have one reportable segment. Revenues and associated costs of our ID Analytics solutions, which were formerly included in the Enterprise Security segment, were included in our remaining reportable segment. • InNovember 2019 , we entered into a credit facility and drew down$500
million of a 5-year term loan to repay an existing term loan of
The credit facility also provides a revolving a line of credit of
billion and a delayed 5-year term loan commitment of
• In
connection with the strategic decision to divest our Enterprise Security
business. We incurred costs of
primarily related to workforce reduction, contract termination, and asset
write-offs and impairment charges.
• In connection with the Broadcom sale, in
to our stockholders through a special dividend of
stock. The aggregate amount of such dividend payments was
• In
million in net cash proceeds, resulting in a gain of
• In
same principal amounts and paid the holders of the new convertible notes a
total cash consideration of $546 million in lieu of conversion price
adjustments related to our $12 special dividend to the exchanged notes. We
adjusted the conversion price of the remaining $250 million of our 2.5%
Convertible Notes and the remaining
Notes and extended the maturity date by one year.
• In
million, which included a cash settlement of the equity conversion feature.
Subsequent event InMay 2020 , we settled the principal and conversion rights of$625 million of our 2.0% Convertible Notes for$1.18 billion in cash. Fiscal calendar and basis of presentation We have a 52/53-week fiscal year ending on the Friday closest toMarch 31 . Fiscal 2020, 2019 and 2018 in this report refers to fiscal year endedApril 3, 2020 ,March 29, 2019 , andMarch 30, 2018 , respectively. Fiscal 2020 was a 53-week year whereas fiscal 2019 and 2018 each consisted of 52 weeks. 22
--------------------------------------------------------------------------------
Table of Contents
Key financial metrics The following table provides our key financial metrics for fiscal 2020 compared with fiscal 2019: (In millions, except for per share amounts) Fiscal 2020 Fiscal 2019 Net revenues$ 2,490 $ 2,456 Operating income $ 355 $ 158 Income (loss) from continuing operations $ 578 $ (110 ) Income from discontinued operations$ 3,309 $ 141 Net income$ 3,887 $ 31
Net income per share from continuing operations - diluted $ 0.90
$ (0.17 )
Net income per share from discontinued operations - diluted $ 5.15 $ 0.22
Net income per share - diluted $ 6.05 $ 0.05
Net cash provided by (used in) operating activities $ (861 ) $ 1,495
As of
(in millions) April 3, 2020 March 29, 2019
Cash, cash equivalents and short-term investments $ 2,263 $ 2,043
Contract liabilities $ 1,076 $ 1,059
• Net revenues increased
from the additional week in the fiscal 2020.
• Operating income increased $197 million primarily due to lowercompensation expense, lower outside service expense, and lower technical
support expense that we achieved as a result of our cost reduction
programs, partially offset by higher advertising and promotional expense
and higher costs recognized in connection with our restructuring plans.
• Income (loss) from continuing operations increased
due to higher operating income and the gains on the sale of the
equity method investment and our ID Analytics solutions, partially offset
by higher income tax expense.
• Income from discontinued operations increased $3,168 million , net of
taxes, primarily due to the gain on the Broadcom sale.
• Net income and net income per share increased primarily due to higher
income from both continuing operations and discontinued operations for the
reasons discussed above.
• Net cash used in operating activities was
provided by operating activities of $1,495 million in fiscal 2019,
primarily due to income tax payments related to our gains on the
divestitures described above.
• Cash, cash equivalents and short-term investments increased
compared to
divestitures described above, largely offset by payments of quarterly and
special dividends, stock repurchases, and net cash used in operating
activities.
• Contract liabilities increased
reflecting higher billings than recognized net revenues.
COVID-19 UPDATE
The COVID-19 pandemic is having widespread, rapidly evolving, and
unpredictable impacts on global society, economies, financial markets, and
business practices. Federal and state governments have implemented measures to
contain the virus, including social distancing, travel restrictions, border
closures, limitations on public gatherings, work from home, and closure of
non-essential businesses. Further, beginning in March 2020 , the U.S. and global
economies have reacted negatively in response to worldwide concerns due to the
economic impacts of the COVID-19 pandemic.
To protect the health and well-being of our employees, partners and third-party
service providers, we have implemented a near company-wide work-from-home
requirement for most employees until further notice, made substantial
modifications to employee travel policies, and cancelled or shifted our
conferences and other marketing events to virtual-only for the foreseeable
future. While we continue to monitor the situation and may adjust our current
policies as more information and public health guidance become available, such
precautionary measures could negatively affect our customer success efforts,
sales and marketing efforts, or create operational or other challenges, such as
a reduction in employee productivity because of the work from home requirement,
any of which could harm our business and results of operations. Further, if the
COVID-19 pandemic has a substantial impact on our employees, partners or
third-party service providers' health, attendance or productivity, our results
of operations and overall financial performance may be adversely impacted.
Additionally, if employees, partners or third-party services providers return to
work during the COVID-19 pandemic, the risk of inadvertent transmission
of COVID-19 through human contact could still occur and result in litigation.
Although we have not yet experienced a material increase in customers
cancellations or a material reduction in our retention rate in 2020, a prolonged
economic downturn could result adversely affect demand for our offerings,
retention rates and harm our business and results of operations, particularly in
light of the fact that our
23--------------------------------------------------------------------------------
Table of Contents
solutions are discretionary purchases and thus may be more susceptible to
macroeconomic pressures, as well impact the value of our common stock, our
ability to refinance our debt, and our access to capital.
The duration and extent of the impact from the COVID-19 pandemic depends on
future developments that cannot be accurately forecasted at this time, such as
the severity and transmission rate of the disease, the extent and effectiveness
of containment actions and the impact of these and other factors on our
employees, customers, partners and third-party service providers. For more
information on the risks associated with the COVID-19 pandemic, please see "Risk
Factors" in Item 1A.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements and related notes in
accordance with generally accepted accounting principles in the U.S. (GAAP)
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.
A summary of our significant accounting policies is included in Note 1 of the
Notes to Consolidated Financial Statements included in this Annual Report on
Form 10-K. An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about matters that are
highly uncertain at the time the estimate is made, if different estimates
reasonably could have been used, or if changes in the estimate that are
reasonably possible could materially impact the financial statements. Management
believes the following critical accounting policies reflect the significant
estimates and assumptions used in the preparation of our Consolidated Financial
Statements.
Business combinations
We allocate the purchase price of acquired businesses to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their
estimated fair values on the acquisition date. Any residual purchase price is
recorded as goodwill. The allocation of purchase price requires management to
make significant estimates and assumptions in determining the fair values of the
assets acquired and liabilities assumed especially with respect to intangible
assets.
Critical estimates in valuing intangible assets include, but are not limited to,
future expected cash flows from customer relationships, developed technology,
trade names, and acquired patents; and discount rates. Management estimates of
fair value are based upon assumptions believed to be reasonable, but which are
inherently uncertain and unpredictable. Unanticipated events and circumstances
may occur which may affect the accuracy or validity of such assumptions,
estimates, or actual results.
Income taxes
We are subject to tax in multiple U.S. and foreign tax jurisdictions. We are
required to estimate the current tax exposure as well as assess the temporary
differences between the accounting and tax treatment of assets and liabilities,
including items such as accruals and allowances not currently deductible for tax
purposes. We apply judgment in the recognition and measurement of current and
deferred income taxes which includes the following critical accounting
estimates.
We use a two-step process to recognize liabilities for uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals
or litigation processes, if any. If we determine that the tax position will more
likely than not be sustained on audit, the second step requires us to estimate
and measure the tax benefit as the largest amount that is more than 50% likely
to be realized upon ultimate settlement. It is inherently difficult and
subjective to estimate such amounts, as this requires us to determine the
probability of various outcomes. We re-evaluate these uncertain tax positions on
a quarterly basis. This evaluation is based on factors including, but not
limited to, changes in facts or circumstances, changes in tax law, effectively
settled issues under audit, and new audit activity. Such a change in recognition
or measurement would result in the recognition of a tax benefit or an additional
charge to the tax provision in the period.
Loss contingencies
We are subject to contingencies that expose us to losses, including various
legal and regulatory proceedings, asserted and potential claims that arise in
the ordinary course of business. An estimated loss from such contingencies is
recognized as a charge to income if it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. Judgment is
required in both the determination of probability and the determination as to
whether a loss is reasonably estimable. We review the status of each significant
matter quarterly, and we may revise our estimates. Until the final resolution of
such matters, there may be an exposure to loss in excess of the amount recorded,
and such amounts could be material. Should any of our estimates and assumptions
change or prove to have been incorrect, it could have a material impact on our
consolidated financial statements for that reporting period.
Discontinued Operations
We review the presentation of planned business dispositions in the 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
24--------------------------------------------------------------------------------
Table of Contents
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 Consolidated Balance Sheets. 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 -
Divestiture and Discontinued Operations in our Notes to Consolidated Financial
statements for additional information.
RESULTS OF OPERATIONSThe following table sets forth our Consolidated Statements of Operations data as a percentage of net revenues for the periods indicated:
Fiscal Year
2020 2019 2018
Net revenues 100 % 100 % 100 %
Cost of revenues 16 19 18
Gross profit 84 81 82
Operating expenses:
Sales and marketing 28 29 33
Research and development 13 17 18
General and administrative 15 17 19
Amortization of intangible assets 3 3 3
Restructuring, transition and other costs 11 9 15 Total operating expenses 70 75 88 Operating income (loss) 14 6 (6 ) Interest expense (8 ) (8 ) (10 ) Other income (expense), net 27 (2 ) 26
Income (loss) from continuing operations before income taxes 33 (4 )
10
Income tax expense (benefit) 10 - (28 ) Income (loss) from continuing operations 23 (4 )
38
Income from discontinued operations 133 6 7
Net income 156 % 1 % 44 %
Note: The percentages may not add due to rounding.
Net revenues
Fiscal Year Variance in %
(In millions, except for 2020 vs.
percentages) 2020 2019 2018 2019 2019 vs. 2018
Net revenues $ 2,490 $ 2,456 $ 2,559 1 % (4 )%
Fiscal 2020 compared to fiscal 2019
Net revenues increased $34 million primarily due to approximately $44 million of
revenues from the additional week in fiscal 2020.
Fiscal 2019 compared to fiscal 2018
Net revenues decreased $103 million primarily due to a $238 million decrease as
a result of the divestiture of our website security (WSS) and public key
infrastructure (PKI) solutions and $33 million decrease in revenue from our
consumer security solutions, partially offset by a $161 million increase in
revenues of our identity and information protection solutions.
25--------------------------------------------------------------------------------
Table of Contents
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
solutions:
Fiscal Year
(In millions, except for per user amounts
and percentages) 2020 2019 2018
Direct customer revenue $ 2,204 $ 2,168 $2,037 /$2,097 (2)
Average direct customer count 20.2 20.7 21.2
Direct average revenue per user (ARPU)
$7.99 /$8.23 (2) Annual retention rate 85 % 85 % 83 % (1) ARPU in fiscal 2020 was normalized to exclude the impact of the extra week on direct revenue, which we estimate to be approximately$41 million of direct customer revenue. Excluding this adjustment, APRU would have been$9.07 in fiscal 2020 (2) Represents a non-GAAP financial measure. Estimated net revenue generated from direct customers during fiscal year 2018 used in the calculation of ARPU excluded a reduction in revenue related to contract liability purchase accounting adjustments required by GAAP, as further discussed below. We define direct customer revenues as revenues from sales of our consumer solutions to direct customers, which we define as those customers who have a direct billing relationship with us. Such customer sources include online acquisition and retention, affiliates, co-marketing, and original equipment manufacturer channels. Direct customers excludes customers of our partners, and our ID Analytics solutions and WSS and PKI solutions, all of which have now been divested. The excluded revenues are summarized in the following table: Fiscal Year (In millions) 2020 2019 2018 Partner revenues$ 240 $ 240 $ 243 ID Analytics revenues$ 46 $ 48 $ 41 WSS and PKI revenues $ - $ -$ 238 Average direct customer count presents the average of the total number of direct customers at the beginning and end of the fiscal year. 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. Non-GAAP fiscal 2018 estimated direct customer revenues used in the calculation of ARPU is adjusted only to exclude a reduction in revenue of$60 million related to purchase accounting adjustments related to theFebruary 2017 acquisition ofLifeLock, Inc. ARPU for fiscal 2018 would have been$7.99 without this adjustment. We believe the adjustment is useful to investors to reflect ARPU trends in our business by improving the comparability of ARPU between periods. Fiscal 2020 and 2019 did not include any adjustments to estimated direct customer revenue as the purchase accounting adjustments were fully amortized prior to fiscal 2019. Non-GAAP estimated direct customer revenues and ARPU have limitations as analytical tools and should not be considered in isolation or as a substitute for GAAP estimated direct customer revenues or other GAAP measures. We monitor APRU because it helps us understand the rate at which we are monetizing our consumer customer base. Annual retention rate is defined as the number of direct customers who have more than a one-year tenure as of the end of the most recently completed fiscal period divided by the total number of direct customers as of the end of the period from one year ago. We monitor annual retention rate to evaluate the effectiveness of our strategies to improve renewals of subscriptions. Net revenues by geographic region Percentage of revenue by geographic region as presented below is based on the billing location of the customer. Fiscal Year 2020 2019 2018 Americas 74 % 73 % 68 % EMEA 15 % 16 % 18 % APJ 11 % 11 % 13 %
Percentages may not add to 100% due to rounding.
26--------------------------------------------------------------------------------
Table of Contents
TheAmericas includeU.S. ,Canada , andLatin America ; EMEA includesEurope ,Middle East , andAfrica ; APJ includesAsia Pacific andJapan . Percentage of revenue by geographic region in fiscal 2020 was similar to fiscal 2019.Americas revenues as a percentage of total revenues increased in fiscal 2019 compared to fiscal 2018 as a result of the sale of our WSS and PKI solutions which proportionally had more revenues in EMEA and APJ than the remaining solutions and higher revenues from our identity and information protection solutions inU.S. during fiscal 2019. Cost of revenues Fiscal Year Variance in % (In millions, except for percentages) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Cost of revenues$ 393 $ 455 $ 463 (14 )% (2 )% Fiscal 2020 compared to fiscal 2019 Our cost of revenues decreased$62 million primarily due to decreases in technical support costs and service costs, partially offset by an increase in royalty charges. In addition, during fiscal 2019, we recorded higher inventory write-offs of$10 million due to our discontinuation of our consumer hardware product line. Fiscal 2019 compared to fiscal 2018 Our cost of revenues decreased$8 million primarily due to a$37 million decrease from the divestiture of our WSS and PKI solutions, partially offset by higher inventory and royalty write-offs due to our discontinuation of our consumer hardware product line in fiscal 2019 and higher fulfillment costs. Operating expenses Fiscal Year Variance in % (In millions, except for percentages) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Sales and marketing$ 701 $ 712 $ 841 (2 )% (15 )% Research and development 328 420 455 (22 )% (8 )% General and administrative 368 410 487 (10 )% (16 )% Amortization of intangible assets 79 80 87 (1 )% (8 )% Restructuring, transition and other costs 266 221 380 20 % (42 )% Total$ 1,742 $ 1,843 $ 2,250 (5 )% (18 )% Fiscal 2020 compared to fiscal 2019 Sales and marketing expense decreased$11 million primarily due to a$75 million decrease in compensation expense and allocated corporate costs, reflecting our cost reduction initiatives. These decreases were partially offset by a$64 million increase in advertising and promotional expense reflecting our higher investments in direct marketing programs. Research and development expense decreased$92 million primarily due to a$77 million decrease in compensation expense and allocated corporate costs, and a$23 million decrease in outside services, reflecting our cost reduction initiatives. General and administrative expense decreased$42 million primarily due to a$34 million decrease in compensation expense other than stock-based compensation and allocated corporate costs, and a$18 million decrease in stock-based compensation expense. Amortization of intangible assets was relatively flat compared to fiscal 2019. Restructuring, transition and other costs increased$45 million primarily due to$101 million of contract cancellation charges incurred in fiscal 2020, a$71 million increase in severance costs, a$45 million increase in asset impairments, and a$20 million increase in stock-based compensation. These increases were partially offset by$185 million costs related to transition projects incurred in fiscal 2019 that were completed by the end of that period. See Note 12 to the Consolidated Financial Statements for further information on our restructuring plans. Fiscal 2019 compared to fiscal 2018 Sales and marketing expense decreased$129 million primarily due to a$41 million decrease as a result of the divestiture of our WSS and PKI solutions, a$40 million decrease in advertising and promotional expense, a$23 million decrease in compensation expense other than stock-based compensation, and a$20 million decrease in stock-based compensation expense. Research and development expense decreased$35 million primarily due to a$30 million decrease in stock-based compensation expense and a$20 million decrease as a result of the divestiture of our WSS and KPI solutions, partially offset by a$15 million increase in outside services. 27
--------------------------------------------------------------------------------
Table of Contents
General and administrative expense decreased$77 million primarily due to an$85 million decrease in stock-based compensation expense, partially offset by a$10 million increase in compensation expense other than stock-based compensation. Amortization of intangible assets decreased$7 million primarily due to the intangible assets sold with the divestiture of WSS and PKI solutions. Restructuring, transition and other costs decreased$159 million primarily due to a$75 million decrease in severance and other restructuring costs. In addition, fiscal 2018 costs included$88 million of transition related costs related to our fiscal 2018 divestiture of our WSS and PKI solutions compared to$3 million in fiscal 2019. Non-operating income (expense), net Fiscal Year Variance in $ (In millions) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Interest expense$ (196 ) $ (208 ) $ (256 ) $ 12 $ 48 Interest income 80 42 24 38 18
Loss from equity interest (31 ) (101 ) (26 )
70 (75 )
Foreign exchange loss (6 ) (11 ) (18 ) 5 7
Gain on divestitures 250 - 653 250 (653 )
Gain on sale of equity
method investment 379 - - 379 -
Transition service expense,
net (19 ) - - (19 ) -
Other 7 13 21 (6 ) (8 )
Non-operating income
(expense), net $ 464 $ (265 ) $ 398 $ 729 $ (663 )
Fiscal 2020 compared to fiscal 2019
Non-operating income, net of expense, increased $729 million primarily due to a
$379 million gain on the sale of the DigiCert equity method investment and a
$250 million gain on the sale of our ID Analytics solutions in fiscal 2020. In
addition, our loss from equity interest that was divested in fiscal 2020
decreased $70 million and our interest income increased $38 million as a result
of higher investments in money market funds purchased with proceeds from the
Broadcom sale.
Fiscal 2019 compared to fiscal 2018
Non-operating income, net of expense, decreased $663 million primarily due to
the absence of the $653 million gain on the divestiture of our WSS and PKI
solutions in fiscal 2018. In addition, our loss from our equity interest that
was acquired in the third quarter of fiscal 2018 increased $75 million . Interest
expense decreased $48 million as a result of lower outstanding borrowings during
fiscal 2019 due to repayments.
Provision for income taxes
We are a U.S. -based multinational company subject to tax in multiple U.S. and
international tax jurisdictions. A substantial portion of our international
earnings were generated from subsidiaries organized in Ireland and Singapore .
Our results of operations would be adversely affected to the extent that our
geographical mix of income becomes more weighted toward jurisdictions with
higher tax rates and would be favorably affected to the extent the relative
geographic mix shifts to lower tax jurisdictions. Any change in our mix of
earnings is dependent upon many factors and is therefore difficult to predict.
Fiscal Year
(In millions, except for percentages) 2020 2019
2018
Income (loss) from continuing operations before income taxes$ 819 $ (107 ) $ 244 Provision for (benefit from) income taxes$ 241 $ 3 (720 ) Effective tax rate on income from continuing operations 29 % (3
)% (295 )%
Fiscal 2020 compared to fiscal 2019
Our effective tax rate increased primarily due to an increase in income taxes
from non-deductible goodwill, and an increase in income taxes as a result of the
Altera Ninth Circuit Opinion. See Note 13 to the Consolidated Financial
Statements for information about the Altera Ninth Circuit Opinion.
Fiscal 2019 compared to fiscal 2018
Our effective tax rate increased primarily due to one-time benefits from Tax
Cuts and Jobs Act (H.R.1) (the 2017 Tax Act) in fiscal 2018. In addition,
increases in tax expense in fiscal 2019 are attributable to the valuation
allowance on capital losses for which we cannot yet recognize a tax benefit.
28--------------------------------------------------------------------------------
Table of Contents
Discontinued operations
Fiscal Year Variance in %
(In millions, except for
percentages) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018
Net revenues $ 1,368 $ 2,288 $ 2,329 (40 )% (2 )%
Gross profit $ 1,035 $ 1,693 $ 1,737 (39 )% (3 )%
Operating income $ 4 $ 234 $ 214 (98 )% 9 %
Gain on sale $ 5,434 $ - $ - N/A N/A
Income before income taxes $ 5,431 $ 228 $ 203 2,282 % 12 %
Income tax expense $ 2,122 $ 87 $ 29 2,339 % 200 %
Income from discontinued
operations $ 3,309 $ 141 $ 174 2,247 % (19 )%
Fiscal 2020 compared to fiscal 2019
Income from discontinued operations in fiscal 2020 reflects a $5,434 million
gain on the Broadcom sale and $2,122 million income tax expense primarily
related to the gain. In addition, we recognized $261 million restructuring,
transition and other costs in fiscal 2020, compared to $20 million in fiscal
2019.
Fiscal 2019 compared to fiscal 2018
Income from discontinued operations decreased in fiscal 2019 compared to fiscal
2018, primarily due to higher income tax expense as we had higher foreign tax
benefit and stock-based compensation windfalls in fiscal 2018.
LIQUIDITY, CAPITAL RESOURCES AND CASH REQUIREMENTSLiquidity
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 ofApril 3, 2020 , we had cash, cash equivalents and short-term investments of$2.3 billion , of which$0.9 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 currentU.S. federal tax regulations generally allows us to make distributions of non-U.S. earnings to theU.S. without incurring additionalU.S. federal tax; however, these distributions may be subject to applicable state or non-U.S. taxes. We have 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. We also have an undrawn revolving credit facility of$1.0 billion which expires inNovember 2024 . Our principal cash requirements are primarily to meet our working capital needs and support on-going business activities, including payment of taxes and cash dividends, funding capital expenditures, servicing existing debt, repurchasing our common stock, and investing in business acquisitions. 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 OnOctober 16, 2019 ,Clearlake Capital Group, L.P. , a private investment firm, andTA Associates , an existing investor ofDigiCert and a private equity firm, completed an investment inDigiCert . As a result, we received$380 million in cash for our equity investment inDigiCert and made income tax payments of approximately$53 million as a result of the transaction. Divestiture of Enterprise Security business OnNovember 4, 2019 , we completed the Broadcom sale under which we received cash proceeds of$10.6 billion . In connection with the transaction, we incurred direct costs of approximately$39 million . In fiscal 2020, we paid approximately$1.9 billion ofU.S. and foreign income taxes and we expect to pay additional income taxes of$85 million in fiscal 2021 as a result of the transaction. As a result of the divestiture, onJanuary 31, 2020 , we made a distribution to our stockholders through a special dividend of$12 per share of common stock in an aggregate amount of$7.2 billion . Sale of ID Analytics solutions OnJanuary 31, 2020 , we completed the sale of our ID Analytics solutions for approximately$375 million in net cash proceeds. 29
--------------------------------------------------------------------------------
Table of Contents
Debt
InNovember 2019 , we entered into a credit facility and drew down$500 million of a 5-year term loan to repay an existing term loan of$500 million . InMarch 2020 , we settled the$250 million principal and conversion rights of our 2.5% Convertible Notes for$566 million in cash. InMay 2020 , we settled the$625 million principal and conversion rights of our 2.0% Convertible Notes for$1.18 billion in cash. Share Repurchase Program During fiscal 2020, we executed repurchases of 68 million shares of our common stock, under our existing share repurchase program for an aggregate amount of$1.6 billion . We have$578 million remaining under our existing share repurchase authorization. Cash flows The following table summarizes our cash flow activities in fiscal 2020, 2019 and 2018: Fiscal Year (In millions) 2020 2019 2018 Net cash provided by (used in): Operating activities$ (861 ) $ 1,495 $ 950 Investing activities$ 11,379 $ (241 ) $ (21 ) Financing activities$ (10,123 ) $ (1,209 )
Cash from operating activities Fiscal 2020 Our cash used in fiscal 2020 reflected net income of$3,887 million adjusted by items, consisting primarily of gains on divestitures of$5,684 million and a gain on the sale of our equity method investment of$379 million , amortization and depreciation of$361 million , and stock-based compensation of$312 million . Changes in operating assets and liabilities during fiscal 2020 consisted primarily of the following: Accounts receivable decreased$583 million , primarily due to the collections of receivables related to our Enterprise Security solutions. Such receivables were not included in the assets that were sold in connection with the Broadcom sale. Contract liabilities decreased$121 million , primarily due to seasonally higher recognized revenue from our Enterprise Security solutions than billings during the period prior to the Broadcom sale. Accrued compensation and benefits decreased$117 million , primarily due to a decrease in headcount as a result of the Broadcom sale and our restructuring activities. Income taxes payable increased$383 million primarily due to taxes owed on the Broadcom sale and the sale of ourDigiCert equity method investment. During fiscal 2020, we made aggregate tax payments of$2 billion related to these transactions. Fiscal 2019 Our cash flows for fiscal 2019 reflected net income of$31 million , adjusted by non-cash items, primarily consisting of amortization and depreciation of$615 million , stock-based compensation of$352 million , and loss from equity interest of$101 million . Changes in operating assets and liabilities during fiscal 2019 consisted primarily of the following: Accounts receivable decreased$113 million , reflecting lower billings and higher collections in the last months of fiscal 2019 compared to the corresponding period in fiscal 2018. Contract liabilities increased$196 million , reflecting higher billings versus recognized revenue. Fiscal 2018 Our cash flows for fiscal 2018 reflected net income of$1.1 billion , adjusted by non-cash amortization and depreciation of$640 million , stock-based compensation expense of$610 million , and offset by a deferred tax benefit of$1.8 billion , primarily as a result of the enactment of the 2017 Tax Act inDecember 2017 , and a gain on divestiture of$653 million . Changes in operating assets and liabilities during fiscal 2018 consisted primarily of the following: Accounts receivable increased$170 million , reflecting higher billings in the last months of fiscal 2018 and our shift in sales to solutions with ratable revenue recognition related to our Enterprise Security solutions. 30
--------------------------------------------------------------------------------
Table of Contents
Contract liabilities increased$491 million , reflecting our shift in sales to contracts related to our Enterprise Security solutions with longer durations subject to ratable versus point in time revenue recognition. This resulted in less in-period revenue recognized and higher billings towards the end of the fiscal year due to the seasonal sales cycles for those solutions. These factors were primarily offset by a decrease of$319 million related to our fiscal 2018 divestiture of our WSS and PKI solutions. Income taxes payable increased$880 million , reflecting the one-time transition tax of$896 million under the 2017 Tax Act. Cash from investing activities Our cash flows from investing activities in fiscal 2020 consisted primarily of$10.9 billion in net proceeds from the Broadcom sale and the divestiture of ID Analytics solutions and$380 million from the sale of our equity method investment inDigiCert . Our investing activities in fiscal 2019 consisted primarily of capital expenditures of$207 million , payments for acquisitions of$180 million , partially offset by proceeds from maturities and sales of short-term investments of$139 million . Our investing activities in fiscal 2018 consisted primarily of$933 million in net proceeds from divestiture of our WSS and PKI solutions, partially offset by payment for acquisitions of$401 million and net purchases of$387 million of short-term investments. Cash from financing activities Our financing activities in fiscal 2020 consisted primarily of payments of dividends and dividend equivalents of$7.5 billion , repurchases of common stock of$1.6 billion , debt repayments of$868 million , consisting of$552 million in principal and a$316 million cash settlement of the equity rights associated with our Senior Convertible notes, and cash consideration of$546 million paid in connection with the exchange of convertible debt. Our financing activities in fiscal 2019 primarily included debt repayments of$600 million , repurchases of common stock of$234 million , payments of dividends and dividend equivalents of$217 million , and tax payments related to vesting equity awards of$173 million . Our financing activities in fiscal 2018 primarily included debt repayments of$3.2 billion . Cash requirements Debt - As ofApril 3, 2020 , our total outstanding principal amount of indebtedness is summarized as follows. See Note 10 to the Consolidated Financial Statements for further information about our debt. (In millions) April 3, 2020 Senior Term Loan $ 500 Senior Notes 2,250 Convertible Senior Notes 1,500 Total debt $ 4,250 InMay 2020 , we repaid$625 million of our 2.0% Convertible Notes. In our second quarter of fiscal 2021, we plan to borrow$750 million under the delayed draw term loan, which will mature inNovember 2024 , and use the proceeds to repay in full our 4.2% Senior Notes, which are due inSeptember 2020 . Debt covenant compliance - The credit agreement we entered into inNovember 2019 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 indebtedness, liens, investments, stock repurchases, and dividends (with exceptions permitting our regular quarterly dividend and other specific capital returns). As ofApril 3, 2020 , we were in compliance with all debt covenants. Dividends - OnMay 14, 2020 , we announced a cash dividend of$0.125 per share of common stock to be paid inJune 2020 . 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 ofApril 3, 2020 , the remaining balance of our stock repurchase authorization is$578 million 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. Restructuring. Under our restructuring plans approved by our Board of Directors in August andNovember 2019 , we have incurred and expect to incur cash expenditures for severance and termination benefits and contract terminations. TheAugust 2019 Plan was completed in fiscal 2020 with total cash payments of$50 million . As ofApril 3, 2020 , we estimate that we will incur total costs of$550 million in connection with theNovember 2019 Plan, excluding stock-based compensation expense, of which up to$200 million is expected to consist of cash expenditures for severance and termination benefits and$110 million of cash expenditures for contract terminations, and up to$240 million is expected to consist of asset write-offs and other restructuring costs. During fiscal 2020, we made$196 million in cash payments related to theNovember 2019 Plan. These 31
--------------------------------------------------------------------------------
Table of Contents
actions are expected to be completed bySeptember 2020 . See Note 12 to the Consolidated Financial Statements for additional cash flow information associated with our restructuring activities. Contractual obligations The following is a schedule of our significant contractual obligations as ofApril 3, 2020 , including those associated with our discontinued operations. The expected timing of payments of the obligations in the following table is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations. Payments Due by Period Less than 1 (In millions) Total Year 1 - 3 Years 3 - 5 Years Over 5 Years Debt (1)$ 4,250 $ 756 $ 1,950 $ 444$ 1,100 Interest payments on debt (2) 508 136 210 135 27 Purchase obligations (3) 439 347 53 33 6 Long-term income taxes payable (4) 683 68 136 299 180 Operating leases (5) 114 34 44 27 9 Total$ 5,994 $ 1,341 $ 2,393 $ 938$ 1,322
(1) In
10 and Note 19 to the Consolidated Financial Statements for further
information on our debt.
(2) Interest payments were calculated based on the contractual terms of the
related Senior Notes, Convertible Senior Notes, and credit facility. Interest
on variable rate debt was calculated using the interest rate in effect as of
further information on the Senior Notes, Convertible Senior Notes, and credit
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 2017 Tax Act which may be paid
through
(5) We have entered into various non-cancelable operating lease agreements that
expire on various dates through fiscal 2029. The amounts in the table above
exclude expected sublease income. See Note 9 to the 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 ofApril 3, 2020 , we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities. Therefore,$695 million in long-term income taxes payable has been excluded from the contractual obligations table. See Note 13 to the 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. In connection with the sale of Veritas and the sale of our Enterprise Security business to Broadcom, we assigned several leases toVeritas Technologies LLC or Broadcom and/or their related subsidiaries. Refer to Note 18 to the Consolidated Financial Statements for further information on our indemnifications. Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to various market risks related to fluctuations in interest rates and foreign currency exchange rates. We may use derivative financial instruments to mitigate certain risks in accordance with our investment and foreign exchange policies. We do not use derivatives or other financial instruments for trading or speculative purposes. Interest rate risk Our short-term investments and cash equivalents primarily consist of corporate bonds and certificate of deposits, respectively. A change in interest could have an adverse impact on their market value. As ofApril 3, 2020 , the carrying value and fair value of our short-term investments and cash equivalents was$434 million . A hypothetical change in the yield curve of 100 basis points would not result in a significant reduction in fair value. As ofApril 3, 2020 , we had$3.8 billion in aggregate principal amount of fixed-rate Senior Notes and convertible debt outstanding, with a carrying amount and a fair value of$3.6 billion , based on Level 2 inputs. Since these notes bear interest at fixed rates, they do not result in any financial statement risk associated with changes in interest rates. However, the fair value of these notes fluctuates when interest rates change. 32
--------------------------------------------------------------------------------
Table of Contents
As ofApril 3, 2020 , we also had$500 million outstanding debt with variable interest rates based on the London InterBank Offered Rate (LIBOR). A reasonably possible hypothetical adverse change of 100 basis points in LIBOR would not result in a significant increase in interest expense on an annualized basis. In addition, we have a$1.0 billion revolving credit facility that if drawn bears interest at a variable rate based on LIBOR and would be subject to the same risks associated with adverse changes in LIBOR. Foreign currency exchange rate risk We conduct business in numerous currencies through 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, primarily in Euro, Japanese Yen, British Pound, and Indian Rupee. In addition, we charge our international subsidiaries for their use of intellectual property and technology and for certain corporate services we provide. Our cash flow, results of operations and certain of our intercompany balances that are exposed to foreign exchange rate fluctuations may differ materially from expectations, and we may record significant gains or losses due to foreign currency fluctuations and related hedging activities. As a result, we are exposed to foreign exchange gains or losses which impacts our operating results. We have a foreign exchange exposure management program designed to identify material foreign currency exposures, manage these exposures, and reduce the potential effects of currency fluctuations on our results of operations through which we enter into foreign exchange forward contracts on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries 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. The gains and losses on these foreign exchange contracts are recorded in interest and other, net in our statement of operations. As ofApril 3, 2020 andMarch 29, 2019 , we had open foreign currency forward contracts with notional amounts of$419 million and$1.1 billion , respectively, to hedge foreign currency balance sheet exposure, with an insignificant fair value. A hypothetical ten percent depreciation of foreign currency would result in a reduction in fair value of our forward contracts of$30 million and$84 million for fiscal 2020 and fiscal 2019, respectively. This analysis disregards the possibilities that the rates can move in opposite directions and that losses from one geographic area may be offset by gains from another geographic area. Additional information with respect to our derivative instruments is included in Note 9 to the Consolidated Financial Statements in this Annual Report on Form 10-K. 33
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
