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
NortonLifeLock Inc. has the largest Consumer Cyber Safety platform in the world,
empowering nearly 80 million users in more than 150 countries. We are the
trusted and number one top of mind brand in consumer Cyber Safety, according to
the 2020 NortonLifelock brand tracking study. We help prevent, detect, and
restore potential damages caused by many cyber criminals.
We have utilized and expect to continue to utilize acquisitions to contribute to
our long-term growth objectives. During fiscal year 2021, we completed the
acquisition of Avira, which provides a consumer-focused portfolio of
cybersecurity and privacy solutions primarily in Europe and key emerging
markets. We believe this acquisition will help accelerate our international
growth.
Fiscal Year Highlights
•In May 2020 , we settled the $625 million principal and conversion rights of our
2.0% Convertible Notes for $1,176 million in cash. The repayments resulted in an
adjustment to stockholders' equity of $578 million and a gain on extinguishment
of $20 million .
•In July 2020 , we completed the sale of our Culver City property for cash
consideration of $118 million , net of selling costs, and recognized a gain on
sale of $35 million .
•In September 2020 , we borrowed $750 million under the Delayed Draw Term Loan,
maturing in 2024, and used the entire amount of the proceeds to repay in full
the principal and accrued interest under our 4.2% Senior Notes due September
2020 . The first amendment to our credit agreement, executed in May 2021 , extends
the maturity date from November 2024 to May 2026 for this tranche. See Note 10
of the Notes to the Consolidated Financial Statements included in this Annual
Report on Form 10-K.
•In October 2020 , we entered into multiple agreements with Broadcom for an
aggregate amount of $200 million to license Broadcom's enterprise software and
security engines and to resolve all outstanding payments and claims related to
the asset purchase and transition services agreement.
•In December 2020 , we substantially completed our restructuring plan (the
November 2019 Plan) in connection with the strategic decision to divest our
Enterprise Security business. We incurred total costs of $509 million since the
inception of the November 2019 Plan, excluding stock-compensation expense,
primarily related to workforce reduction, contract termination, and asset
write-offs and impairment charges.
•In January 2021 , we completed the acquisition of Avira for total aggregate
consideration of $344 million , net of $32 million cash acquired.
•On April 1, 2021 , we completed the sale of certain land and buildings in
Mountain View for cash consideration of $100 million , net of selling costs, and
recognized a gain on sale of $63 million .
Fiscal calendar and basis of presentation
We have a 52/53-week fiscal year ending on the Friday closest to March 31 .
Fiscal 2021, 2020, and 2019 in this report refers to fiscal year ended April 2,
2021 , April 3, 2020 , and March 29, 2019 , respectively. Fiscal 2020 was a 53-week
year, whereas fiscal 2021 and 2019 each consisted of 52 weeks.
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Key financial metrics
The following table provides our key financial metrics for fiscal 2021 compared
with fiscal 2020:
Fiscal Year
(In millions, except for per share amounts) 2021 2020
Net revenues $ 2,551 $ 2,490
Operating income $ 896 $ 355
Income from continuing operations $ 696 $ 578
Income (loss) from discontinued operations $ (142) $ 3,309
Net income $ 554 $ 3,887
Net income per share from continuing operations - diluted $ 1.16 $ 0.90
Net income per share from discontinued operations - diluted $ (0.24) $ 5.15
Net income per share - diluted $ 0.92 $ 6.05
Net cash provided by (used in) operating activities $ 706 $ (861)
As of
(in millions) April 2, 2021 April 3, 2020
Cash, cash equivalents and short-term investments $ 951 $ 2,263
Contract liabilities $ 1,265 $ 1,076
•Net revenues increased $61 million , primarily due to increased sales of our
consumer security products and our identity and protection products, partially
offset by the divestiture of our ID Analytics solutions and the additional week
of revenue recognized during fiscal 2020.
•Operating income increased $541 million , primarily due to lower compensation
expense, outside services expense, and facility and IT costs that were driven by
our cost reduction programs, partially offset by a legal accrual relating to an
ongoing civil lawsuit involving a government contract with the U.S. General
Services Administration (GSA).
•Income from continuing operations increased $118 million , primarily due to
higher operating income, gain on sale of our Culver City and certain Mountain
View properties, gain on extinguishment of debt, and lower income tax expense,
partially offset by the absence of the $379 million gain on sale of our equity
method investment in DigiCert and the $250 million gain on the sale of our ID
Analytics solutions, which were divested in fiscal 2020.
•We incurred a loss from discontinued operations, net of tax, compared to a gain
during the corresponding period in fiscal 2020, primarily due to the absence of
gain on the sale of certain of our Enterprise Security assets and certain
liabilities to Broadcom Inc. (the "Broadcom sale"), the absence of operating
income as a result of the Broadcom sale, and a settlement with Broadcom in the
second quarter of fiscal 2021 of all outstanding payments and certain claims
related to the Broadcom sale.
•Net income and net income per share decreased, primarily due to the loss from
discontinued operations for the reasons discussed above, partially offset by
higher income from continuing operations.
•Cash, cash equivalents and short-term investments decreased by $1,312 million
compared to April 3, 2020 , primarily due to repayment of debt, net of
borrowings, and to a lesser extent, payments for dividends and dividend
equivalents, and payment for acquisitions. The payments were partially offset by
net cash provided by operating activities and proceeds from the sale of our
Culver City and certain Mountain View properties. In May 2020 , we settled the
principal and conversion rights of $625 million of our 2.0% Convertible Notes
for $1,176 million in cash.
•Contract liabilities increased $189 million compared to April 3, 2020 ,
primarily due to higher billings than recognized revenue and the acquisition of
Avira.
COVID-19 UPDATE
The COVID-19 pandemic is having widespread, rapidly evolving, and
unpredictable impacts on global society, economies, financial markets, and
business practices. To protect the health and well-being of our employees,
partners and third-party service providers, we implemented a near company-wide
work-from-home requirement for most employees, made substantial modifications to
employee travel policies, and cancelled or shifted our conferences and other
marketing events to virtual-only. We continue to monitor the situation and plan
to adjust our current policies as recommendations and public health guidance is
changing. To date, we have not seen any meaningful negative impact on our
customer success efforts, sales and marketing efforts, or employee productivity.
Nevertheless, as 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.
The U.S. and global economies have experienced a recession due to the economic
impacts of the COVID-19 pandemic. Although we did not experience a material
increase in cancellations by customers or a material reduction in our retention
rate in
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2021, we may experience such an increase or reduction in the future, especially
in the event of a prolonged recession as a result of the COVID-19 pandemic. A
prolonged recession could adversely affect demand for our offerings, retention
rates and harm our business and results of operations, particularly in light of
the fact that our solutions are discretionary purchases and thus may be more
susceptible to macroeconomic pressures, as well impact the value of our common
stock, 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 new variants of the disease, the extent,
effectiveness and acceptance of containment actions, such as vaccination
programs, 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. Third-party valuation specialists are
also utilized for certain estimates. 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.
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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
2021 2020 2019
Net revenues 100 % 100 % 100 %
Cost of revenues 14 16 19
Gross profit 86 84 81
Operating expenses:
Sales and marketing 23 28 29
Research and development 10 13 17
General and administrative 8 15 17
Amortization of intangible assets 3 3 3
Restructuring, transition and other costs 6 11 9
Total operating expenses 51 70 75
Operating income 35 14 6
Interest expense (6) (8) (8)
Other income (expense), net 5 27 (2)
Income (loss) from continuing operations before income 34 33 (4)
taxes
Income tax expense 7 10 - Income (loss) from continuing operations 27 23 (4) Income (loss) from discontinued operations (6) 133 6 Net income 22 % 156 % 1 %
Note: The percentages may not add due to rounding. Net revenues
Fiscal Year Variance in %
(In millions, except for 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
percentages)
Net revenues $ 2,551 $ 2,490 $ 2,456 2 % 1 %
Fiscal 2021 compared to fiscal 2020
Net revenues increased $61 million primarily due to a $91 million increase in
sales of our consumer security products and a $60 million increase in sales of
our identity and protection products. This was driven by the increase in our
direct customer count year-over-year, and stable annual retention rate and
average revenue per user (ARPU) in fiscal 2021. The increase was partially
offset by a $46 million decrease as a result of the divestiture of our ID
Analytics solutions in January 2020 and $44 million of revenue recognized during
an additional week in fiscal 2020.
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.
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:
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Fiscal Year
(In millions, except for per user amounts and
percentages) 2021 2020 2019
Direct customer revenue (1) $ 2,286 $ 2,204 $ 2,168
Partner revenues $ 270 $ 240 $ 240
Average direct customer count (2) 21.2 20.2 20.7
Direct customer count (at quarter-end) 23.0 20.2 20.3
Direct average revenue per user (ARPU) (3) $ 9.01 $ 8.90 $ 8.74
Annual retention rate 85 % 85 % 85 %
(1) Direct customer revenues in fiscal 2021 excludes a $5 million reduction of
revenue from a contract liability purchase accounting adjustment recognized
during the last quarter due to the acquisition of Avira. Direct customer
revenues in fiscal 2020 and 2019 excludes $46 million and $48 million ,
respectively, of revenue from ID Analytics solutions, which were divested in the
fourth quarter of fiscal 2020.
(2) Average direct customer count for fiscal 2021 is calculated as an average of
the fiscal quarters. The average direct customer count for the fourth fiscal
quarter was pro-rated to include 1.6 million customers from the Avira
acquisition.
(3) 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, ARPU would have been $9.07 in
fiscal 2020.
We define direct customer revenues as revenues from sales of our consumer
solutions to direct customers, which we define as active paid users who have a
direct billing relationship with us at the end of the reported period. Users
with multiple products or entitlements are counted for based on which solutions
they are subscribed. We exclude users on free trials and promotions and users
who have indirectly purchased our product or services through partners unless
such users convert or renew their subscriptions directly with us.
From time to time, we update our methodology due to changes in the business. In
fiscal 2021, the average direct customer count calculation has been refined
primarily to pro-rate for acquisitions that happen during a quarter, such as
Avira, which was acquired in January 2021 . The full year average direct customer
count is calculated as an average across the quarters. This change in
methodology had an immaterial impact to historical amounts presented.
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 ARPU 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
2021 2020 2019
Americas 72 % 74 % 73 %
EMEA 16 % 15 % 16 %
APJ 12 % 11 % 11 %
Percentages may not add to 100% due to rounding.
The Americas include U.S. , Canada , and Latin America ; EMEA includes Europe ,
Middle East , and Africa ; APJ includes Asia Pacific and Japan .
Percentage of revenue by geographic region remained consistent in fiscal 2021,
2020, and 2019.
Cost of revenues
Fiscal Year Variance in %
(In millions, except for 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
percentages)
Cost of revenues $ 362 $ 393 $ 455 (8) % (14) %
Fiscal 2021 compared to fiscal 2020
Our cost of revenues decreased $31 million primarily due to decreases in royalty
charges and technical support costs, partially offset by an increase in
commissions, reflecting higher investments in affiliate marketing programs.
Fiscal 2020 compared to fiscal 2019
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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 $10 million due to our discontinuation of our consumer hardware
product line.
Operating expenses
Fiscal Year Variance in %
(In millions, except for 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
percentages)
Sales and marketing$ 576 $ 701 $ 712 (18) % (2) % Research and development 267 328 420 (19) % (22) % General and administrative 215 368 410 (42) % (10) % Amortization of intangible assets 74 79 80 (6) % (1) % Restructuring, transition and other 161 266 221 (39) % 20 % costs Total$ 1,293 $ 1,742 $ 1,843 (26) % (5) % Fiscal 2021 compared to fiscal 2020 Sales and marketing expense decreased$125 million primarily due to a$147 million decrease in shared facility and IT costs, partially offset by a$12 million increase in advertising and promotional expense. Research and development expense decreased$61 million due to a$44 million decrease in shared facility and IT costs and a$17 million decrease in compensation, driven by lower headcount. General and administrative expense decreased$153 million primarily due to a$70 million decrease in compensation expense, a$55 million decrease in shared facility and IT costs, and a$43 million decrease in outside services expense, partially offset by an additional legal accrual of$25 million in fiscal 2021 relating to an ongoing civil lawsuit involving a government contract with the GSA. The overall decreases in our sales and marketing, research and development and general and administrative expenses were driven by our cost reduction initiatives. Amortization of intangible assets was relatively flat compared to fiscal 2020. Restructuring, transition and other costs decreased$105 million primarily due to a$50 million decrease of contract cancellation charges and a$59 million decrease in severance costs in connection with ourNovember 2019 restructuring plan (theNovember 2019 Plan). The decrease was partially offset by a$11 million increase in asset write-offs and impairments. See Note 12 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information on our restructuring plans. 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. 28 -------------------------------------------------------------------------------- Table of Contents Non-operating income (expense), net Fiscal Year Variance in $ (In millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019 Interest expense$ (144) $ (196) $ (208) $ 52 $ 12 Interest income 4 80 42 (76) 38 Loss from equity interest - (31) (101) 31 70 Foreign exchange gain (loss) 1 (6) (11) 7 5 Gain on divestitures - 250 - (250) 250 Gain on sale of equity method - 379 - (379) 379
investment
Gain on early extinguishment of debt 20 - - 20 - Gain on sale of properties 98 - - 98 - Transition service expense, net (9) (19) - 10 (19) Other 6 7 13 (1) (6)
Non-operating income (expense), net
(265) $ (488) $ 729
Fiscal 2021 compared to fiscal 2020 Non-operating income, net of expense, decreased$488 million primarily due the absence of the$379 million gain on sale of our equity method investment inDigiCert and the$250 million gain on the sale of our ID Analytics solutions, which were divested in fiscal 2020. The decrease was partially offset by the absence of loss from our equity interest inDigiCert , gain on sale of our Culver City property and certain Mountain View properties, and the gain on extinguishment of debt due to the repayment of our 2.0% Convertible Notes in fiscal 2021. 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 theDigiCert 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. Provision for income taxes We are aU.S. -based multinational company subject to tax in multipleU.S. and international tax jurisdictions. 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) 2021 2020 2019
Income (loss) from continuing operations before income
819 $ (107)
taxes
Provision for income taxes $ 176 $ 241 $ 3
Effective tax rate on income (loss) from continuing 20 % 29 % (3) %
operations
Fiscal 2021 compared to fiscal 2020
Our effective tax rate decreased primarily due to releases in uncertain tax
positions and favorable withholding tax rulings.
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 of the Notes to the Consolidated
Financial Statements included in this Annual Report on Form 10-K for information
about the Altera Ninth Circuit Opinion.
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Discontinued operations
Fiscal Year Variance in %
(In millions, except for 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
percentages)
Net revenues $ 1 $ 1,368 $ 2,288 (100) % (40) %
Gross profit $ 1 $ 1,035 $ 1,693 (100) % (39) %
Operating income (loss) $ (177) $ 4 $ 234 (4,525) % (98) %
Gain on sale $ - $ 5,434 $ - N/A N/A
Income (loss) before income taxes
228 (103) % 2,282 %
Income tax expense (benefit)
87 (102) % 2,339 %
Income (loss) from discontinued
141 (104) % 2,247 %
operations, net of taxes
Fiscal 2021 compared to fiscal 2020 We incurred a loss from discontinued operations in fiscal 2021, compared to a gain during the corresponding period in fiscal 2020, primarily due to the absence of gain on the Broadcom sale, the absence of operating income as a result of the Broadcom sale, and a$200 million settlement with Broadcom in the second quarter of fiscal 2021 of all outstanding payments and certain claims related to the Broadcom sale. 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. 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 ofApril 2, 2021 , we had cash, cash equivalents and short-term investments of approximately$1.0 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 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 billion . The first amendment to our credit agreement, executed inMay 2021 , extends the maturity date fromNovember 2024 toMay 2026 . For additional discussion on the amendment, see Note 10 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. 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. Divestiture of Enterprise Security business In fiscal 2020, we completed the sale of certain assets and the assumption of certain liabilities of our Enterprise Security business to Broadcom. During fiscal 2021, we paid approximately$70 million ofU.S. and foreign income taxes as a result of the transaction. OnOctober 1, 2020 , we entered into multiple agreements with Broadcom and paid an aggregate amount of$200 million . We licensed Broadcom's enterprise software, multiple security engines and related telemetry for 5.6 years. In addition, we resolved all outstanding payments and certain claims related to the asset purchase and transition services agreements. 30 -------------------------------------------------------------------------------- Table of Contents Debt InMay 2020 , we settled the$625 million principal and conversion rights of our 2.0% Convertible Notes for$1,176 million in cash. InSeptember 2020 , we borrowed$750 million under the Delayed Draw Term Loan, maturing inNovember 2024 , and used the entire amount of the proceeds to repay in full the principal and accrued interest under our 4.2% Senior Notes dueSeptember 2020 . InMarch 2021 , we made a$6 million quarterly principal payment on our initial term loan (the Initial Term Loan) and a$9 million quarterly principal payment on the Delayed Draw Term Loan. OnMay 7, 2021 , we entered into the first amendment to our credit agreement, which provides an additional five year term loan (the First Amendment Additional Term Loan), and extends the maturity date of the Initial Term Loan, the Delayed Draw Term Loan, and revolving credit facility fromNovember 2024 toMay 2026 . For additional discussion on the amendment, see Note 10 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K. InMay 2021 , we entered into a Convertible Notes Purchase Agreement (the "Agreement") under which we agreed to repurchase$250 million in aggregate principal amount of our new 2.50% convertible senior notes due 2022. Under the terms of the Agreement, we paid an aggregate of$365 million onMay 20, 2021 , representing$24.40 per underlying share into which the notes are convertible, accrued and unpaid interest through the date of settlement, and a portion of the cash dividend that we declared onMay 10, 2021 . For additional discussion on the Agreement, see Note 19 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K Sale of certain assets OnJuly 27, 2020 , we completed the sale of our Culver City property for cash consideration of$118 million , net of selling costs. OnApril 1, 2021 , we completed the sale of certain land and buildings in Mountain View for cash consideration of$100 million , net of selling costs. Acquisition of Avira OnJanuary 8, 2021 , we completed our acquisition of Avira for total aggregate cash consideration of$344 million , net of$32 million cash acquired. Share repurchase program During fiscal 2021, we executed repurchases of 15 million shares of our common stock under our existing share repurchase program for an aggregate amount of$304 million . Cash flows The following table summarizes our cash flow activities in fiscal 2021, 2020 and 2019: Fiscal Year (In millions) 2021 2020 2019 Net cash provided by (used in): Operating activities$ 706 $ (861) $ 1,495 Investing activities$ (69) $ 11,379 $ (241) Financing activities$ (1,903) $ (10,123) $ (1,209) Increase (decrease) in cash and cash equivalents$ (1,244) $ 386
Cash from operating activities Fiscal 2021 Our cash from operating activities in fiscal 2021 reflected net income of$554 million , adjusted by non-cash items, primarily consisting of amortization and depreciation of$150 million , impairments of current and long-lived assets of$90 million , stock-based compensation expense of$81 million , deferred income taxes of$42 million , and gain on sale of properties of$98 million . Changes in operating assets and liabilities during fiscal 2021 consisted primarily of the following: Contract liabilities increased$118 million , primarily due to higher billings than recognized revenue. Accounts payable decreased$44 million , primarily due to a reduction in operating costs in connection with ourNovember 2019 Plan, which was completed during fiscal 2021. Income taxes payable decreased$299 million primarily due to tax payments made during fiscal 2021, including payments related to the Broadcom sale, payments of federal and foreign income taxes, and a decrease as a result of favorable tax rulings. During fiscal 2021, we made aggregate tax payments of$341 million related to these transactions. Fiscal 2020 Our cash flows for fiscal 2020 reflected net income of$3,887 million , adjusted by non-cash items, primarily consisting 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: 31 -------------------------------------------------------------------------------- Table of Contents 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. Cash from investing activities Our cash flows used in investing activities in fiscal 2021 primarily consisted of payment for the Avira acquisition of$344 million , net of$32 million cash acquired, partially offset by proceeds from the sale of our Culver City and certain Mountain View properties of$218 million and proceeds from maturities and sales of short-term investments of$68 million . Our investing activities in fiscal 2020 primarily consisted of$10,918 million in net proceeds from the Broadcom sale and the divestiture of our ID Analytics solutions and$380 million from the sale of our equity method investment inDigiCert . Cash from financing activities Our financing activities in fiscal 2021 primarily consisted of repayments of debt of$1,941 million in connection with the settlement of our 2.0% Convertible Notes, repayments of our 4.2% Senior Notes, and quarterly principal payments of our Initial Term Loan and Delayed Draw Term Loan, payment of dividends and dividend equivalents of$373 million , and repurchases of common stock of$304 million , partially offset by proceeds from issuance of debt of$750 million under our Delayed Draw Term Loan. Our financing activities in fiscal 2020 primarily consisted of payments of dividends and dividend equivalents of$7,481 million , repurchases of common stock of$1,581 million , 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$546 million paid in connection with the exchange of convertible debt. Cash requirements Debt - As ofApril 2, 2021 , our total outstanding principal amount of indebtedness is summarized as follows. See Note 10 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information about our debt. (In millions) April 2, 2021 Term Loans$ 1,235 Senior Notes 1,500 Convertible Senior Notes 875 Mortgage Loans 10 Total debt$ 3,620 Debt covenant compliance - The credit agreement we entered into inNovember 2019 , which was amended and extended throughMay 2026 onMay 7, 2021 , 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 2, 2021 , we were in compliance with all debt covenants. Dividends - OnMay 10, 2021 , we announced a cash dividend of$0.125 per share of common stock to be paid inJune 2021 . 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 2, 2021 , the remaining balance of our stock repurchase authorization is$274 million and does not have an expiration date. OnMay 4, 2021 , our Board of Directors approved an incremental share repurchase authorization of$1,500 million , bringing the total authorized amount under the stock repurchase program to$1,774 million . The authorization 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 inNovember 2019 andDecember 2020 , we have incurred cash expenditures primarily for severance and termination benefits, contract terminations, and other exit and disposal costs. TheNovember 2019 Plan was completed in fiscal 2021 with total cash payments of$139 million during the fiscal year. As ofApril 2, 2021 , we estimate that we will incur total costs up to$20 million in connection with theDecember 2020 Plan. During fiscal 2021, we made$9 million in cash payments related to theDecember 2020 Plan. These actions are expected to be 32 -------------------------------------------------------------------------------- Table of Contents completed in fiscal 2022. See Note 12 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further cash flow information associated with our restructuring activities. Contractual obligations The following is a schedule of our significant contractual obligations as ofApril 2, 2021 , including those associated with our discontinued operations. The expected timing of payments of the obligations in the following table is estimated based on current information. Timing of payments and actual amounts paid may be different, depending on the time of receipt of goods or services, or changes to agreed-upon amounts for some obligations. Payments Due by Period (In millions) Total Less than 1 Year 1 - 3 Years 3 - 5 Years Over 5 Years Debt$ 3,620 $ 313
367 110 162 94 1
Purchase obligations (2) 380 296 70 9 5
Deemed repatriation taxes (3) 594 69 196 329 -
Operating leases (4) 100 29 41 21 9
Total $ 5,061 $ 817 $ 1,622 $ 2,602 $ 20
(1)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
April 2, 2021 . See Note 10 of the Notes to the Consolidated Financial Statements
included in this Annual Report on Form 10-K for further information on the
Senior Notes, Convertible Senior Notes, and Term loans.
(2)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.
(3)These amounts represent the transition tax on previously untaxed foreign
earnings of foreign subsidiaries under the Tax Cuts and Jobs Act which may be
paid through July 2025 .
(4)We have entered into various non-cancelable operating lease agreements that
expire on various dates through fiscal 2028. The amounts in the table above
exclude expected sublease income. See Note 9 of the Notes to the Consolidated
Financial Statements included in this Annual Report on Form 10-K 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
April 2, 2021 , we are unable to make reasonably reliable estimates of the period
of cash settlement with the respective taxing authorities. Therefore, $525
million in long-term income taxes payable has been excluded from the contractual
obligations table. See Note 13 of the Notes to the Consolidated Financial
Statements included in this Annual Report on Form 10-K 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 to
Veritas Technologies LLC or Broadcom and/or their related subsidiaries. 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.
Refer to Note 18 of the Notes to the Consolidated Financial Statements included
in this Annual Report on Form 10-K 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 of April 2, 2021 , the carrying value
and fair value of our short-term investments and cash equivalents was $18
million . A hypothetical change in the yield curve of 100 basis points would not
result in a significant reduction in fair value.
As of April 2, 2021 , we had $2.4 billion in aggregate principal amount of
fixed-rate Senior Notes and convertible debt outstanding, with a carrying amount
and a fair value of $2.4 billion , based on Level 2 inputs. Since these notes
bear interest at
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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.
As of April 2, 2021 , we also had $1.2 billion 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 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, Israeli New Shekel, Swiss Franc, Singapore Dollar
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 Other income (expense), net in the
Consolidated Statements of Operations.
As of April 2, 2021 and April 3, 2020 , we had open foreign currency forward
contracts with notional amounts of $338 million and $419 million , 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 $20 million and $30
million for fiscal 2021 and fiscal 2020, 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 11 of the Notes to the Consolidated Financial Statements in this Annual
Report on Form 10-K.
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